11 May 2005

Law Now

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VAT Law and the ECJ Andersen Decision

Introduction

This is an update on the impact for UK businesses of the controversial decision of the ECJ in the Arthur Andersen case relating to VAT on insurance-related services.

Following our e80 on the original decision (and the Eversheds Commercial Briefing of March 2005 on the decision (please contact the email address at the end for a copy of this briefing)) we can now report that HM Revenue and Customs (HMRC) has given notice that the UK VAT exemption for insurance-related services is too wide. Accordingly Group 2 of Schedule 9 to the VAT Act 1994, the notice states, will be brought "into line with the judgment".

The process will involve HMRC consulting formally with the industry for a 12 week period, the commencement date for which is still to be announced.

It appears from the HMRC comments in its notice that HMRC itself does not intend to take any retrospective action to levy any uncharged VAT.

Of particular concern to companies who have outsourced services caught by the ECJ decision, however, HMRC does suggest that businesses "affected by the judgment" do not have to wait for an amendment to UK law but CAN make retrospective adjustments in respect of services on which VAT should have been charged OR begin to apply VAT to current and future charges for those services.

This decision clearly raises the prospect of a number of changes that will affect both insurance companies and service providers.

Watchpoints

We believe some of the areas requiring attention as a result of the ECJ decision and now the HMRC notice include:

for insurers - will a review be required of existing contracts for affected outsourced services to determine, at least, whether the service provider will be entitled to charge VAT, now or when the law is changed, and any risks arising if a service provider elects to make retrospective adjustments?

what financial adjustments will be required in charging structures?

to what extent will insurers need to strengthen reserves as a consequence of the greater cost of outsourced services?

for service providers - when and how should the additional VAT charge be introduced, in line with contractual obligations? What advantages will accrue from making retrospective adjustments and how will this affect customers?

are there alternatives to the current arrangements that could be adopted to minimise VAT going forward?

Alan Connell
VAT Director
Direct: (0113 200) 4249
alanconnell@eversheds.com

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