Jarlath O'Keefe Director Indirect Tax Services

We have heard much talk in the media in recent times, emanating from the insurance industry, that premiums are falling due to lower costs for insurers as a consequent of a number of factors. A recent European Court of Justice judgment in relation to VAT may put a spanner in the works and lead to increased premiums for consumers in the long run.

The case in question concerned the VAT exemption which currently applies to outsourced insurance services. Many insurance companies have in recent years outsourced much of their back office functions to specialist service providers who typically would undertake all of the tasks which previously would have been done in-house by the insurance company. To date, the position in Ireland is that the Revenue Commissioners have allowed exemption from VAT for these services where the service provider had delegated authority to bind the insurance company to contracts and to settle claims, etc. The European Court of Justice in the Andersen Case ruled on the 3 March 2005 that these services did not qualify for exemption.

The Irish VAT legislation closely mirrors that of the EU Sixth Council Directive (the cornerstone of VAT legislation throughout Europe) and provides for exemption of ‘insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agent …’ The Court found that specialist service providers such as Andersen could not be regarded as insurance brokers since it does not have complete freedom as to the choice of insurer. It can also not be regarded as insurance agent since its services do not constitute services that typify an insurance agent. In the Court’s opinion, the fact that Andersen did not have a direct relationship with the insured was an important consideration in determining whether it was acting as an insurance agent (i.e. Andersen only became involved in the process after the insured had submitted the policy application which would most likely have been channelled through a conventional insurance agent). It is not clear what view would have been taken by the Court had Andersen had a role in the sales function, i.e. would the existence of this direct relationship with the insured mean that exemption would apply to the range of Andersen’s back office services?

How will the Andersen judgment effect the position for insurance outsourcing in Ireland and Irish insurers receiving such services? The Revenue Commissioners are currently reviewing the position in regard to the existing exemption. On 8 March 2005, the Revenue issued a statement confirming that it would consult with the insurance industry and other interested parties and that until such time that it had completed its review, service providers could continue with their existing treatment of outsourced services. The speed of the Revenue’s confirmation of its position was a clear indication of its concern regarding the implications for the Irish insurance industry. Our contacts with the Revenue Commissioners on the matter would suggest that while they are under an obligation to comply with the Court ruling, they may be prepared to work with the industry with a view to mitigating the effects of the judgment. Certainly, in our view, service providers with an active role in the sales process have a strong case for arguing for retention of their exemption.

The one thing that is clear is that in the event that exemption no longer applies to outsourced services, there will be significant increased costs for insurers, which at the end of the day will be paid for by you and me by way of higher premiums