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EU Retreats On Insurance VAT Exemption Reform

by Ulrika Lomas,, Brussels

17 November 2010

The European Union (EU) has declared that it is unlikely to push forward with the reform and simplification of the value-added tax (VAT) exemption on insurance and the wider financial services industry.

The current rules - which set VAT on insurance at zero across Europe - were designed in the 1970s, but have failed to keep up with the evolution of the industry and outsourcing trends and look set to remain in place due to the lack of agreement within the European Union.

When the European directive on financial services was introduced in 1997, insurance and banking services were given a blanket exemption from charging VAT. This meant that services were charged at zero-rate VAT, but that any VAT on costs incurred was non-recoverable, and so lost. The principle reason for this approach was that it was considered too complicated to introduce VAT on these services without distorting the market.

However, the increasing use of outsourcing, especially in the UK and Ireland, has undermined this, TMF has said. Many companies involved in the insurance chain introduced VAT charges within their services as a way of offsetting the lost input VAT.

In an attempt to kill off these market distortions, the European Commission produced the first draft of a new Financial Services VAT Directive in 2007, designed to capture changes in outsourcing in the banking and insurance industry. The principal proposal was an option to 'opt-in' to charge VAT and deduct input VAT on outsourced services, plus the pooling of exempt services.

On the evening of November 15 however, the EU declared a lack of consensus and consequently progress towards reform has effectively stalled.

The current rotating Presidency is held by the Belgians, who said: "Whilst the majority of proposed definitions seem to be acceptable to delegations, they will need to be considered against the background of adjustments to the overall tax burden on the financial industry, and in the light of regulatory changes ensuing from the financial crisis."

Richard Asquith, Managing Director of TMF VAT & Insurance Premium Tax (IPT) Services, commented on the European Union’s decision that: “This development will bring much relief to UK insurers who risked losing up to 20% (the new UK VAT rate) on their outsourced administration and claims handling costs as irrecoverable VAT. Also, brokers were nervous that many of their ancillary insurance services would have now increased by 20% if the exemption had been reformed.”

TMF noted that the announcements come shortly after the European Court of Justice's ruling this month in the Axa case in which it declared that many previously VAT-exempt services are in fact VATable - meaning new, unrecoverable costs for insurers.

TAGS: court | compliance | tax | European Commission | value added tax (VAT) | tax compliance | Ireland | tax avoidance | law | banking | financial services | insurance | United Kingdom | tax breaks | services | Europe

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