Insurance hit by EU VAT bill
The European Court of Justice (ECJ) has ruled that EU insurers that have outsourced claims handling and other back office functions face a large, unrecoverable VAT bill.
This will be a major setback for the UK and Irish insurance industries which have been at the forefront of outsourcing many non-core activities. The new ruling may force HMRC to revise its VAT concession to UK insurers, and backs up the 2005 Anderson ruling from the ECJ.
Countries such as Germany have long sought to block the tax break as their insurance sectors are still heavily integrated.
Should irrecoverable VAT be charged to insurers on outsourcing?
The ECJ case (Aspiro: C-40/15, 17 March 2016) concerns a Polish insurance outsourcing company that handled a range of claims processing and associated repair co-ordination services for motor and household insurers. The company, Aspiro, asked the Polish tax authorities to clarify if it should charge EU VAT to its insurance company customers. Insurers are exempt from EU VAT as a financial service. This means if they are charged VAT they cannot offset it against any sales VAT and so the VAT suffered is a direct cost to them.
The question was referred by the Polish courts to the ECJ. The court has now ruled that outsourced claims services are not entitled to the VAT exemption under the EU VAT Directive even though they are carried out in the name of an insurance company. This confirms the 2005 ECJ Arthur Andersen case ruling that policy management and claims handling outsourcing are not VAT exempt. This ruling had not yet been imposed by the UK and Ireland in the anticipation that it may be reviewed.
UK and Ireland hit hardest
The UK insurance sector and HRMC were potentially living on borrowed time on the insurance outsourcing VAT exemption. There had been a hope of a rethink across Europe, including a favorable VAT Directive on financial services. The ruling will be a boost to EU countries with more consolidated markets, including Germany, which had blocked EU reforms in this area.
If the UK tax authorities were to impose VAT on outsourcing, it could lead to a £8 and £14 rise in the average household insurance bills for motor and household & contents insurance, respectively.