VAT and outsourced services in the insurance sector
The Decision of the CJEU in the case of Aspiro SA has recently been published, and when implemented it will not be good news for the UK’s insurance sector, which will incur increased VAT costs on many outsourced activities.
Aspiro was a Polish company which provided a comprehensive service for the settlement of insurance claims, but was not an insurer, insurance broker or insurance agent. It was a specialist claims handling company responsible for 18 tasks relating to the settlement of claims under a contract with the insurer. The Polish Finance Minister decided that the only task capable of VAT exemption in Poland was ’settling substantive claims and taking substantive decisions on claims’. On appeal the Polish Court decided in favour of the taxpayer, finding that the Polish legislation was intended to extend exemption to beyond what was provided in the VAT Directive. The Finance Minister appealed, and the court referred the case to the CJEU.
What the court decided
Article 135 1(a) of Council Directive 2006/112/EC exempts ’Insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents’, and the CJEU decided that:
• To qualify for VAT exemption as an ‘insurance transaction’, the supplier had to have a legal relationship with the insured.
• To qualify for VAT exemption as a ‘related service’ the supplier had to be an insurance broker or insurance agent; and the supplier must have a relationship with both the insurer and the insured.
• An ’insurance agent’ is defined by the activities carried out and these must include the essential activities of an insurance agent, such as the finding of prospective clients and their introduction to the insurer (as decided in the Arthur Andersen Case).
What does this mean?
The Polish position is similar to the UK’s in that the UK legislation (upon which a taxpayer can rely) is generally seen as far wider than Article 135. HM Revenue & Customs will be publishing guidance, but it is inevitable that the UK legislation will at some future time have to be changed in order to reduce the scope for VAT exemption.
Following any changes, it is reasonable to assume that:
• Insurance-related services (including those outsourced) provided by insurance brokers will continue to be VAT exempt (provided they meet the other existing tests for exemption).
• Outsourced services, such as claims handling and policy administration, will only be exempt for suppliers if they prospected and brought the customer and insurer together in the first place i.e. they qualify as an ’insurance agent’ because they carry out what is considered to be one of the essential activities of an ’insurance agent’.
When implemented, this will clearly place suppliers of specialist back-office claims handling services at a competitive disadvantage when compared to similar services supplied by brokers. Although the definition of an ’insurance broker’ and an ‘insurance agent’ can both have a regulatory status element to them, current ‘insurance agents’ that fall within the VAT exemption by reference to what they do rather than what they are – particularly specialist claims handling companies and loss adjusters or solicitors acting under a delegated authority – will be severely disadvantaged, as they will no longer be considered ’insurance agents’.
Any proposed changes must be considered in detail and not rushed into, and these are some of the key issues.
’Insurance Agent’ or ’insurance agent’?
Are there two ways where you can be considered as an ’insurance agent’? The first, which I will call an ’upper case’ Insurance Agent, is where you are regulated and recognised as an Insurance Agent for one or more insurers. This is prevalent throughout most of the EU. The second, which I will call a ’lower case’ insurance agent is where you become one as a direct result of carrying out one of the essential activities of an ’Insurance Agent’.
Unfortunately, the Andersen Case has been interpreted (mis-interpreted?) to restrict the essential activities of an insurance agent to just one – the finding of prospects and their introduction to the insurer – in spite of the fact that the Judgment implicitly recognised that there was more than one essential activity, and the example it cited was just that – an example of one of the activities. Until this interpretation is challenged and hopefully sanitised, VAT exemption for many insurance intermediation activities will be under pressure to be further restricted solely to insurance prospecting activities.
Are all insurance related services performed by an Insurance Broker or an Insurance Agent VAT exempt?
This is a key point. For example, in order to VAT-exempt claims handling services, must an Insurance Broker or Insurance Agent have prospected and arranged cover for that policyholder who is now making a claim? Or, because of their regulatory status, can they in effect mix and match, introducing some and handing claims for others? The former seems too restrictive for brokers and upper case Insurance Agents, but you can understand the logic behind the thinking that would make it apply to lower case insurance agents i.e. those who become agents solely by way of what they do – prospecting in the first place.
This is potentially a competitive issue between brokers and other outsourcers, and one that may upset the fiscal neutrality of the exemption.
Core and ancillary insurance services
The impact of the Card Protection Plan (CPP) and other cases may also come into play. For example, if you are a lower case insurance agent and have successfully prospected and placed the insured on risk, the collection of the premium, calculation of the commission and any issue of the paperwork would presumably be ancillary. It may extend to policy administration, and potentially the handling of claims for policyholders you have introduced, so it underpins the previously mentioned logic. It goes without saying (but I will say it anyway) – there is more to an insurance policy than just selling the insurance in the first place.
What should you do?
In general, wait and see. However, there are a couple of additional points.
Whilst you can continue to exempt services that fall to be exempt under the UK legislation, you should take care that any future outsourcing contracts for back office insurance services, including claims handling, should allow for the addition of VAT to be charged.
If you are about to embark upon the construction of a brand new commercial building to provide an outsourced claims handling operation to insurers, you might like to consider whether to apply the Aspiro (or Andersen’s) case. In theory this would allow you to reclaim back the input VAT on the construction and on-going operations although, clearly, you will then have to charge VAT when your competitors may not. Still, if the exemption’s days are numbered anyway…
In summary, when implemented this case will have far reaching financial implications for the insurance sector, so before that happens, it is vital that HMRC works in partnership with industry representatives and stakeholders so that the consequences are clearly understood, and are introduced sensibly at a future date.