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European Commission decision could mean increased tax costs for UK insurers

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Since a landmark decision in Staatssecretaris van Financiën v Arthur Andersen & Co. Accountants c.s. (C-472/03) by the CJEU 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, HMRC 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 27 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.  It is expected that 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 ten 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.'

Categories: In brief , VAT