ECJ Ruling Could Leave EU Insurers Facing Large Rise In VAT Costs

by Robert Lee, Tax-News.com, London

17 January 2005

EU insurers who outsource back-office administrative functions may face a substantial increase in their tax bills if the European Court of Justice follows the opinion of the Advocate General in a case relating to VAT on consulting services.

The case in question concerns the VAT liability of services provided by Arthur Andersen Consulting (now Accenture) to a Dutch insurer, which includes functions such as the acceptance of requests for insurance, claims handling and the organisation and administration of IT, among other services.

An exemption from VAT is provided to certain agency and brokerage services allowing insurers who outsource administrative services to escape tax on the amounts charged by third parties to carry out administrative tasks.

However, in the opinion of the Advocate General, these services should not be exempt from VAT under the Sixth Directive as they do not fall into the strict definition of ‘related services’ provided by an ‘insurance agent.'

According to accounting firm KPMG, this “restrictive view” of the VAT exemption for insurance services by the AG would have “wide implications for outsourcing and the insurance industry” in the UK (and a number of other EU member states) if followed by the ECJ.

In a report in the Financial Times, Frank Sangster, head of the financial services indirect tax team at KPMG, noted that UK insurers could pay between £500,000 and £100 million a year to third parties for carrying out back office functions, meaning a potential VAT bill of £17.5 million on a £100 million UK contract.

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