CJEU judgment on VAT treatment of outsourcing in the insurance industry

The cost of outsourcing insurance related services for insurance companies may increase following the decision of the Court of Justice of the European Union (“CJEU”) which held that such services should be standard rated for VAT purposes (Case C-40/15, Minister Finansów v Aspiro SA, formerly BRE Ubezpieczenia sp. z o.o.) (“Aspiro”).

Any such VAT would be irrecoverable for most insurers and contractual arrangements need to be considered carefully to ascertain how new and existing contracts allocate this risk.

Aspiro - Facts

Aspiro (a Polish company) provided an insurance claims handling service for an insurance company. These services included:

a) receiving claims and drawing up comprehensive documents for processing claims;

b) corresponding with claimants and providing detailed information on the claims settlement procedure; and

c) preparing reports and undertaking any other necessary activities to settle claims.

While Aspiro acted in the name of the insurance company, it did not have a contractual relationship with the claimants.

Aspiro argued that the provision of the services outlined above was VAT exempt under Article 135(1)(a) of the VAT Directive. Art 135(1)(a) exempts “insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents”. The Supreme Administrative Court in Poland referred the following question to the CJEU for a preliminary ruling:

“Must Article 135(1)(a) of the VAT Directive be interpreted as meaning that services such as those in the present case, which are supplied on behalf of an insurance undertaking by a third party - in the name and on behalf of the insurer - which has no legal relationship with the insured person, are covered by the exemption referred to in that provision?”

Decision

The CJEU held that the services provided by Aspiro did not fall within the exemption and were therefore VATable. This was on the basis that:

a) to qualify as an insurance or reinsurance transaction, there must be a contract between the service provider and the insured; and

b) for the services to be related services performed by insurance brokers and insurance agents:

  -       the service provider must have a relationship with both the insurer and the insured party, whether directly or indirectly; and

  - the services must be linked with finding prospective clients and introducing them to an insurer with a view to having an insurance contract.

Applying this to Aspiro, as:

a) there was no contract between Aspiro and the claimants; and

b) settling claims is not linked to finding prospective clients and introducing them to an insurer with a view to concluding an insurance contractor,

the CJEU held that the services provided by Aspiro were not VAT exempt.

Where does this leave outsourcing insurance services in the UK?

The test set out by the CJEU above is contrary to HMRC’s guidance (VATINS5210 (“Guidance”) which states that “claims handling services ... provided separately from introductory services, can continue to be treated as VAT exempt”.

Historically, HMRC considered itself able to take this approach of treating intermediary services as exempt because of the ongoing negotiations to modernise the financial services VAT exemption and recast it in a new regulation and directive. The hope was that the EU law would be changed to follow the UK’s approach. However, it proved impossible to agree the new financial services exemption and the European Commission has now withdrawn its proposal to rewrite the VAT Directive. Despite this, HMRC has not updated the Guidance even though the industry is still relying on it, and this remains the case as at the date of publication. It is currently therefore still possible for the UK industry to treat such services as VAT exempt, but there is no visibility as to how long this position will remain.

Looking Forward

The decision that services such as those provided by Aspiro are standard rate supplies for VAT purposes interposes an additional layer of irrecoverable VAT. While it is acknowledged that VAT exemptions have a narrow ambit, criticisms have been raised in the industry that the CJEU’s approach has become too narrow and insufficient weight has been given to fiscal neutrality arguments.

Assuming that the position in the UK may change in line with this decision, fees for outsourcing services (insofar as they do not involve the introduction of clients to the insurer) in the UK would attract irrecoverable VAT at 20% in the future. We would therefore recommend that insurers outsourcing intermediary services such as claims handling services consider the financial impact that any change in the UK’s approach to these rules might have on their business and begin to consider what steps could be taken to mitigate this. This would include allocating the risk of these additional costs in the relevant contract. At a minimum, insurers should consider whether termination provisions would allow them to terminate the arrangements on reasonable notice if the exemption no longer applies.

In case of any change of law, we would not expect the exempt VAT treatment of historical supplies to be prejudiced, but we similarly would not necessarily expect any grandfathering rules to be put in place to protect supplies under existing contracts going forward.