European Commission decision could mean increased tax costs for UK insurers

The UK’s policy of allowing certain outsourced services to be provided to insurers without VAT is now left uncertain following the European Commission’s decision to abandon its ongoing review of the VAT treatment of financial services in the EU.

Since a landmark decision by the European Court in 2005, the UK’s decision to allow certain outsourced services (such as claims handling and policy administration) to be provided without VAT has been out of step with the majority of the other member states. Until now, HM Revenue and Customs have resisted changing the UK’s treatment of such services on the basis that the European Commission has been undertaking a wider review of the VAT treatment of VAT and financial services.

On Wednesday 27th October the European Commission announced that it is to abandon this exercise.  What HMRC intend to do next is not yet known, but the Commission’s decision creates considerable uncertainty for the insurance market.  We expect other VAT cases on the horizon to provide further insight into whether the current position adopted by the UK is sustainable and more will be heard from HMRC at that point.

Richard Insole, indirect tax partner at Deloitte, said: “The decision by the European Commission means that an issue that has been in the ‘long grass’ for 10 years now needs to be reconsidered. There are alternative ways of mitigating costs, for example the use of other specific exemptions. If HMRC is required to reassess their VAT position in this area, it could result in significantly increased operating costs for those UK insurers who use outsourcers. This in turn could have an impact on policy premiums as a result. It may take many years for this issue finally to be resolved.”