VAT: changes to outsourced insurance transactions

United Kingdom

The pre-Budget report on Monday 5th December 2005 may bring an announcement as to the implementation of new rules for VAT on outsourced insurance transactions.

Any new rules may not become operative until the date of the budget in 2006. And there may still be some concessions for long term closed funds and funds in run-off, but nothing is certain at this stage.

This Law-Now provides an update on the current situation. There could now be only three or four months to act in order to protect the position and avoid an unnecessary tax hit.

CMS Cameron McKenna has been at the heart of the representation process.

Intermediation of risk, not persons

News indicates that the scope for the exemption may be slightly broader than previously envisaged. Our view on the Consultation as it stood, was that it seemed to be suggesting that the requirement for exemption was for an insurance intermediary to be "finding prospective customers and introducing them to an insurer" for agents, and if a broker "having complete freedom as to the choice of insurer for clients". However, the Andersen judgment stated that the intermediation element consists of "finding prospects and introducing". HMRC now seem to have accepted that intermediation refers to risk, not persons.

What you should be doing now

For VAT purposes, we can assume that any guidance will drive on whether there is intermediation of risk by a disclosed agent or broker.

Disclosure in the supply chain

Where an outsourcer, agent or broker discloses themselves in the supply chain, it may be possible to get exemption, if the role includes "finding prospects / insurers and introducing the parties (insurers/ insureds)" but the regulatory position needs to be carefully analysed. For outsourcers there may be other "insurance transaction" or "insurance agent" solutions but these need to be explored in relevant commercial, tax and regulatory terms.

Undisclosed in the supply chain

Where a party wishes to remain undisclosed within the supply chain, there are more difficulties here, as the ECJ has effectively ruled out the insurance agency / brokerage VAT exemption from applying. It may be possible that HMRC may offer some kind of concession for long-term agreements covering closed and run-off books and we should await guidance in that respect. Other solutions can still be considered, including prepayments using escrow arrangements, secondment of staff, certain joint venture structures and the processing of transfers and payments. If all else fails there is still the insourcing option.

Going forwards: can we help you effect the Andersen twin pillars?

We are currently advising clients strategically as to whether they have ongoing VAT issues, and how best to deal with them, including the regulatory consequences that would flow from any changes.

You should now be reviewing existing arrangements and new deals and seeking to effect the "Andersen twin pillars", i.e. for any outsourcing arrangement, i.e. is there both:

  1. Disclosure within the supply chain? and
  2. "Finding prospects/ insurers and introducing the parties"

Thinking strategically

There is not a lot of time to go until a budget change, and you may be able to protect your position for the 2006 year by using prepayments via an escrow account, which only passes the monies over on successful performance over the period.

Act now: VAT exemption and regulatory compliance need to be dealt with together so consider getting some advice on how best to do it.

At Cameron McKenna we have been able to provide some good news for clients and help to protect their position from possible downsides costing hundreds of thousands or millions of pounds.