Case announces that insurers and outsourcers must pay VAT on services

Businesses should develop a strategy to mitigate the damage this will cause

What are the financial and business consequences of the case?

Following the ECJ judgment on 3 March 2005 in the case of Arthur Andersen & Co, Accountants c.s. v. Staatsecretaris van Financiën, Case C-472/03, it is highly likely that the UK government will have to comply with the consequences of the judgment, and impose an extra cost on insurance intermediary services comprising the assistance in the administration and performance of insurance contracts. Insurers would face an increase of 17.5% on the cost of outsourced activities such as:

• telesales operations where the outsourcer accepts the proposal on behalf of the insurer
• claims handling, even where the claims handler has power to settle a claim
• back office administration

Once introduced, this is a threat to your business and could cost millions.

What type of business does this apply to?

Any business that is involved in the insurance and reinsurance supply chain either providing or buying in insurance services other than sales agent or broker services. This has serious implications for insurers who outsource part of their business, and in terms of the attractiveness of an outsource offer, to service providers providing services of an administrative nature, such as dealing with new customers and amendments, calculation of commission to agents and maintaining contact with them, dealing with policy mis-selling, and claims handling.

How will this affect you?

If your business is involved in either the receipt of these services as insurer, or the provision of these services as outsource provider, you need to plan your next steps, both strategically and tactically.

Insurers: You need to develop a plan for how to mitigate the damaging impact of an irrecoverable tax charge above the line.

Insurance service providers: Your competitiveness is affected by this decision and you need to consider how to restructure the delivery of your service so that incremental VAT is not applied. This will deliver considerable market advantage.

What steps should you take?

Plan your strategy for mitigating the potential loss. We believe you should do this in three ways:

• Consider reconfiguring your business
• Lobby the UK Government, the Commission and politicians
• Litigate to the Grand Chamber of the Court of Justice, for a full review (e.g. as part of a Group Litigation Action). Any further challenge should cover:
  • A more detailed linguistic analysis of the VAT, Insurance intermediary and mediation directives, focussing in particular on the original language versions of the documents
  • An analysis of the preparatory working documents for the introduction of the directives
  • A full analysis of the effect on Treaty freedoms including outflow of business from the EU

There is still scope we believe for a further challenge to the Grand Chamber of the European Court of Justice, because, just like the House of Lords, they are not bound by their previous decisions.

Our VAT team, led by Peter Mason (former head of VAT at Abbey National and a recognised authority both on VAT and financial services and litigating at the ECJ), together with our Insurance and regulatory team, can use their experience to define the problems you face and the strategy you should adopt. They can advise on implementing agreed strategic objectives, including business reconfiguration, lobbying and litigation. The VAT team is at the cutting edge of litigation and is supported by a multi-disciplinary team in insurance, regulatory, corporate and structured finance experts.

Want to know more? Come to our strategy meeting

We will be hosting a VAT Insurance meeting at our offices on 13 April at 3pm. This will highlight the issues and strategies we believe you should take to overcome the problems. There will be an opportunity to meet and discuss the issues with our team and to share ideas with the insurance industry. Please click here to reserve your place at this workshop. Please note places are limited.