United States: Outsourced Insurance Intermediary Services: Update on Forthcoming Changes to the UK VAT Exemption

On 3 March 2005, the European Court of Justice ("ECJ") gave its judgment in Staatssecretaris van Financien v Arthur Andersen & Co Accountants cs¹. The case concerned VAT exemptions for insurance intermediary services (so-called "back office" activities, e.g. insurance contract administration, claims handling services), and in particular whether third parties, offering insurance intermediary services, were VAT exempt. Insurance companies and their agents are VAT exempt². The advantages to consumers, if third parties offering insurance intermediary services are considered insurance agents and so rendered VAT exempt, are obvious. Insurance companies will be able to outsource their intermediary services at competitive rates, enabling themselves to offer consumers lower prices for their products and services. The ECJ held that the essential part of the work of an insurance agent was to find clients and to introduce them to the insurer, that insurance intermediary services were not such activities, and that accordingly they were not VAT exempt.

Previous to this judgment the VAT exemption for insurance agents had been interpreted widely to include outsourced third parties performing "back office" activities of insurance companies. Because the ECJ’s judgments are precedental (i.e. they amend previous law and state the current law) all EU member states need to incorporate this judgment into their national law.³

On 18 May 2005, HM Revenue & Customs, the UK Government VAT office ("HMRC"), posted a document on its website entitled Business Brief 11/05, in which it noted the ECJ’s judgment and announced plans to consult with industry via a consultation document prior to making any changes to UK VAT law. HMRC announced that it would publish the consultation document in July 2005.

On 27 July 2005, HMRC posted a document on its website entitled Business Brief 14/05 announcing the publication of the consultation document and set the deadline for responses for 30 September 2005.

As at the end of January 2006, the consultation document and responses are still to be released by HMRC.

All insurance companies, operating in the UK or in any EU member state, are advised to constantly monitor and take account of national and EU law regarding VAT exemptions for insurance agents. Although the facts of the Andersen case were narrow (the insurance agent in question accepted applications for insurance policies, issued those policies, and managed claims), the ECJ’s interpretation of those facts and corresponding judgment were wide. Technically, the ECJ judgment is currently law and insurance agents are no longer VAT exempt (unless they find clients and introduce them to the insurer); though if member states have not, like the UK, as yet implemented the ECJ ruling into national law, those member states may be less rigorous in enforcing the ECJ’s ruling.

^{1 Case C-434/03 3 C.M.L.R. 38}

2 Article 13B(a) of the sixth VAT Directive 77/88/EEC

3 Further details of the Andersen case are referred to in previous Client Alert Outsourced Insurance

Intermediary Services Forthcoming Changes to the UK VAT Exemption June 3, 2005

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.