Decision from the European Court threatens havoc with significant increased VAT costs for the insurance sector
A judgement handed down on 17 March by the Court of Justice of the European Union has confirmed that the EU wide VAT exemption (applying to insurance related transactions) has to be interpreted strictly. The UK currently allows VAT exemption to the provision of insurance as well as a range of associated insurance services including the handling of claims.
However, on a straightforward reading of the judgement just released it is clear that the Court considers the practice of extending the scope of exemption to claims handling services is a step too far, and not in accordance with the scope of VAT exemption provided by EU VAT legislation (which in turn is binding on each EU Member State). It has been increasingly common for UK insurers to outsource certain aspects of their activity, so the decision risks the introduction of significant additional VAT costs for insurers (by having irrecoverable VAT applied to those services in future) as well as acting as a barrier to such outsourcing.
It is understood the HMRC are already aware of this decision and have instructed their Policy Team to consider its effects. If HMRC and HM Treasury accept the conclusion that the UK’s interpretation of the VAT exemption is too wide it is hoped that any change will only apply from a future date especially since UK VAT legislation specifically provides for VAT exemption to extend to other named insurance related services.
A link to the decision can be found here:
If you need any assistance with this or any other VAT related matter, please do not hesitate to contact one of our resident VAT experts: Mark Hetherington (firstname.lastname@example.org) or Ian Coulthard (email@example.com).
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