CVC Blog – Insurance intermediary services – the water continues to build behind the dam

When the CJEU released its decision in the case Arthur Andersen & Co Accountants (C-472/03) in March 2005 HMRC said that “implementation of the judgement will lead to VAT becoming chargeable on many of the outsourced services currently provided to insurers.

In July 2005 HMRC set out proposals for changes that were to become effective from 1 January 2006.  However, following responses to its consultation HMRC decided to defer change pending a review by the European Commission.  This European Commission review started and even appeared to be making progress towards a better set of harmonised rules with specific provision for outsourcing.  However, in 2015 it was abandoned when it became clear that the European Commission could not obtain the support of all member states for a clear framework of harmonised rules.

So more than 10 years after the Andersen decision … back to square one!

There have been many other cases concerning the nature of insurance intermediary services since Andersen.  It is clear from some of these cases that UK VAT law exempts supplies that should not be exempt under EU law.  This was highlighted again when the CJEU gave its recent judgement in the Aspiro case that the service of settling insurance claims could not be exempt for VAT when the claims handler had no involvement in arranging the insurance to which those claims relate.

We know that UK law has to change, unless perhaps the referendum vote in June 2016 is to leave the EU!  We can also be confident that if the UK does not deal with this then eventually the European Commission will take action to force a change.   What we don’t know is when and to what extent the rules will change.

As in most things to do with VAT, one can debate the precise interpretation of the court decisions that signpost change.  For example, Aspiro appears to allow exemption of claims handling provided by a person that has some involvement in arranging the original insurance to which the claims relate.   However, is a “critical mass” of introductory service related work required to allow the entire supply to be treated as a composite exempt supply?   What are the implications for management of “shell entities” such as mutual insurers and P&I Clubs?

Current HMRC guidance breaks management services relating to P&I Clubs into four broad headings, the third of which is “policy administration and claims handling” and the fourth  “general and financial management.”  HMRC policy is that the entire P&I Club management supply is:

  • exempt when services under the first three headings predominate, and
  • standard-rated when services under the fourth heading predominate

So what happens if policy administration and claims handling (or a part thereof) moves from an “exempt” to “standard-rate” classification and the balance between exempt and taxable supplies shifts dramatically?  One would hope that HMRC would not seek such a switch (because these services are provided in conjunction with introductory intermediary services).  Unfortunately, every possible outcome is arguable in the world of VAT and nothing can be viewed as certain.

There will almost certainly be further consultation before legislative change occurs and an opportunity for the industry to influence the final position.  However, there may be steps that can be taken immediately to reduce risk and alternative strategies to consider.

As regards other potential strategies, HMRC is about to launch a consultation on VAT groups following a CJEU decision that the current rules are too restrictive.  For some organisations VAT groups could offer a solution to the problem, particularly if the government was minded to find a way to lessen the impact on an important sector and side-step a potential confrontation with the European Commission.

If one considers the basic definition of a VAT group as legally distinct entities bound by close economic, financial and organisational links,  how much more financially and economically linked could organisations such as P&I Clubs and P&I Club managers be when in effect one entity is a shell entity and the other provides almost 100% of the people and resources that it needs to operate?  Indeed, could one take the view that that outsourcing in general often leads to organisations having close organisational and financial links, bearing in mind that in effect the customer is in effect carving out a part of its business and asking someone else to operate it.

Of course the problem with strategies such as getting involved in consultations and lobbying is that they cost money and don’t have a certain outcome.  Perhaps for this reason it is often left to representative bodies to do the heavy lifting.  However, whilst representative bodies do an excellent job they are often under resourced, frequently relying on volunteers.  And of course, representative bodies need to take account of potentially conflicting views within the membership they represent and cannot factor into their approach the unique facts that may exist for any given member organisation.

Any large business operating in the insurance sector that does not consider the potential impact of the VAT group consultation is abstaining from an opportunity to influence rules that could have a huge cost impact for years to come.

A core CVC philosophy is that where possible it is usually better to find a route around a problem rather than get involved in a dispute.  Any change in the law on insurance intermediaries is likely to simply result in battle formations being drawn up along a new front line.  Expanded VAT groups could for some offer a way out of this interminable source of conflict.  What is required is some creative thinking and persuasion in the hope of a gentle release of what has been building up behind this particular dam.   HMRC’s hands will be tightly bound by EU law on the definition of insurance intermediary services.  They are not so tied when determining the criteria for VAT group treatment.


This blog is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. CVC cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this blog. Specialist VAT advice should always be sought in relation to your particular circumstance.