A judgement by the European Court on an abstruse point of VAT law has sent both the financial services industry and the multibillion-dollar, back-office business processes outsourcing industry into a spin.
The nub of the matter is that insurance companies, which are VAT exempt and so can’t claim back VAT charged by suppliers, could be forced to pay VAT for a range of outsourced services that are currently exempt from VAT.
Jim Hillen, a partner at law firm Dundas & Wilson, points out that until now outsource contracts between insurance companies and suppliers have been drafted in such a way that the outsourcer is categorised as an ‘insurance agent’. Insurance agents, usually intermediaries such as brokers and independent financial advisors, are also VAT exempt, so a contract that has the outsourcer stand as an insurance agent neatly side-steps the need for the outsourcer to charge VAT on services rendered.
“If, as an insurance agent, you handle matters yourself with your own staff, you do not get charged VAT. However, if those staff transfer to an outsource company and provide the same service, you will get VAT added to the service,” Hillen explains.
This would make outsourcing unviable, since the simple exchange of a document would make the same service 17.5% more expensive for the insurance company. The inevitable outcome would either be to kill off outsourcing for this sector, or business and the general public would have to stump up by way of increased premiums.
In Hillen’s view, the legal profession can be guaranteed to do its best to find a way round the ruling. But Peter Skerritt, a partner at Maclay Murray & Spens, warns that everyone in the UK will be shadow boxing until Customs & Excise declares its position on the ruling. “The ECJ has gone for a narrow definition of what constitutes an insurance agent,” he says.
Skerritt says the ECJ appears to have focused on a detail and in doing so has missed the wood for the trees. It appears to have lost sight of the bigger issue, namely that its judgment has thrown a legitimate business sector into turmoil,” he says.
“C&E will either make its position clear in a guidance note or by way of legislation, and the latter could take up to a year. Until we know what C&E is thinking, it is hard for anyone to start redrafting contracts. We’ll all be considering our options and there will be some intensive lobbying over the next few months,” says Skerritt.
The ECJ ruling concerns the Andersen case, where Andersen Consulting Management Consultants accepted new insurance business on behalf of its client Universal Leven NV. The court decided it was not an insurance agent and therefore its services not exempt from VAT.