Insurers Face Higher Tax Bills After European Court's VAT Decision

by Robert Lee, Tax-News.com, London

07 March 2005

Many firms in the insurance, broking and outsourcing industries are facing a significant increase in tax costs as the result of a European Court of Justice ruling that VAT must be charged where insurance-related back office functions have been outsourced.

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

The ECJ stated in its ruling that these services do not qualify for exemption for VAT purposes.

According to business services firm Deloitte, the ECJ ruling will mean that the outsourcing of back office functions will be subject to VAT where the services mirror those that otherwise would have been performed by the insurance company.

Andrew Burns, head of insurance for Deloitte's indirect tax practice noted that:

"This is a major move away from the current UK treatment where exemption is applied to a range of insurance related services. It will mean that VAT will become chargeable on outsourced services where it was not in the past and this will be an added cost of doing business."

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