Europe: Aspiro ruling could increase VAT costs for outsourced services

The Aspiro ruling narrows the definition of a VAT-exempt insurance transaction. If implemented in the UK, it will be bad news for the UK insurance industry, as it will significantly increase VAT costs for outsourced services.

The Aspiro case
Aspiro was a Polish company providing a comprehensive service for the settlement of insurance claims, but was not an insurer, broker or insurance agent. It was, however, a specialist claims handling company responsible for 18 tasks relating to the settlement of claims under a contract with the insurer. Following a dispute with the Polish authorities over the application of the VAT Directive, the case was transferred to the European Court of Justice. 

Article 135 of the Council Directive 2006/112/EC exempts "insurance and reinsurance transactions including related services performed by insurance brokers and insurance agents". This has been implemented into UK Law into what is often regarded as a wider scope for exemption.

The ECJ decided the following:

• To qualify for VAT exemption as an ‘insurance transaction', the supplier has to have a legal relationship with the insured;
• To qualify for VAT exemption as a ‘related service', the supplier has to be an insurance broker or insurance agent; and the supplier must have a relationship with both the insurer and the insured;
• An ‘insurance agent' is defined by the activities carried out and these must include the essential activities of an insurance agent, such as the finding of prospective clients and their introduction to the insurer, as decided in the Andersen case. 

Will Aspiro be implemented post-Brexit?
Before the UK voted to leave the European Union, it seemed inevitable that UK legislation would have to be changed in order to take account of the Aspiro decision. Whether or not this decision remains relevant will ultimately depend on which type of agreement the UK negotiates with the EU, because in some scenarios the UK may still be required to implement ECJ court decisions even if formally outside of the EU.

If any changes come into effect, it would be reasonable to assume that insurance-related services provided by brokers will remain exempt from VAT. Outsourced services, however, will only be exempt for suppliers if they qualify as an ‘insurance agent' carrying out the essential activity of finding prospects and introducing them to the insurer. This applies to services such as claims handling and policy administration.

On implementation, suppliers of specialist back-office claims handling services will be placed at a competitive disadvantage when compared to similar services supplied by brokers. Current insurance agents that fall within the VAT exemption - by reference to what they do as opposed to what they actually are - will be disadvantaged, as they will no longer be considered insurance agents.

It has long been the UK's position that, for example, a specialist claims handling company could exempt its services because it would be automatically regarded as an insurance intermediary. This case demonstrates that an insurance intermediary is not necessarily an insurance agent or insurance broker. This, therefore, will in particular affect specialist claims handling companies and loss adjusters or solicitors acting under a delegated authority.

What is an insurance agent?
There is a need to define the term insurance agent. In fact, there may be two ways in which a firm can be considered as an insurance agent.

The first is a recognised and regulated insurance agent - which is prevalent throughout the EU - where a firm is acting as an insurance agent for one or more insurers. For the purposes of VAT, a company may also be considered as an insurance agent as a direct result of carrying out the "essential activity" of an insurance agent. Aspiro (and also previously the Andersen case) limits the "essential activity" solely to one of finding prospective customers and introducing them to the insurer, conveniently ignoring other core activities of an insurance agent, in particular claims handling.

Unfortunately therefore, the Andersen case has been interpreted to restrict the essential activities of an insurance agent to just the one, and it is doubtful to this day whether or not that was the intention at the time. However, until this interpretation is challenged, VAT exemption for insurance intermediation carried out by agents will be under pressure to be further restricted solely to insurance prospecting activities.

The impact on the insurance market
The UK market is recognised for its dynamism and innovation, leading to a blooming in providers of niche expert services, whether at the front end or back office. Although the supplier may be intermediating between insured and insurer and providing an insurance-related service, these two factors alone would not be sufficient to secure VAT exemption because that supplier would not qualify as an insurance agent, an interpretation upheld in the UK case of Riskstop Consulting.

This makes it more difficult for new entrants into the market supplying specialist insurance services because they will have to add VAT to what would otherwise have been an exempt supply chain.

Both the Aspiro and Andersen cases are awkward and potentially very costly for the UK insurance market - and to its credit HM Revenue & Customs has not to date been rushing to have them introduced.

Ultimately, however, it remains to be seen whether the aftermath of Brexit will mean the implementation of this ruling never sees the light of day.

THE ASPIRO RULING WILL BE DISCUSSED DURING THE NEXT CLAIMS CLUB MEETING WHICH INCLUDES A BREXIT PANEL. TO SIGN UP CLICK HERE