04 July 2005

Law Now

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Insurance VAT Exemption

In early July, HM Revenue and Customs (HMRC) will be issuing their consultation document on proposed changes to the UK VAT legislation. These will restrict substantially the scope of the current exemption for insurance business in line with the European Court of Justice decision in the Arthur Andersen case (Case no. C-472/03).

In April, CMS Cameron McKenna held a very successful seminar on the implications of the Andersen case. Participants confirmed the very large potential costs to the industry. Professor Melchior Wathelet, former Judge of the European Court, spoke of the difficulties of challenging the decision in further litigation. It seems clear that a decision has been made to restrict the current VAT exemption and the consultation document will focus more on how the judgment is to implemented rather than debating whether changes are necessary.

* the impact of the narrower VAT exemption
* identify insurance related services and income streams which will remain VAT exempt
* identify those insurance services which will become subject to VAT in 2006.
* consider various ways in which insurance services can be restructured in order to maintain the benefit of the narrower VAT exemption.
* consider key issues for the industry in responding to the consultation document, particularly on timing and the regulatory impact assessment.

We believe HMRC will be taking a broad view of the Andersen decision which will threaten the current VAT exempt status of a diverse range of insurance activities, some more obvious than others.

Outsourcing

A key feature of the UK insurance industry - will be impacted in relation to claims handling, policy administration and other areas as well as end to end outsourcing by insurers (whether on open books/new business or on books which are closed to new business or in run off).

White Labeling

Another area where insurance services which are currently VAT exempt are at risk. The potential loss of VAT exemption is much wider and includes some activities conducted by the London Market and other brokers (such as placing and managing binding authorities and insurer service fees/retained premium which is increasingly - post-Spitzer - attributed to outsourced services for insurers as distinct from commission for the placement of individual risks), other intermediaries selling insurance as a secondary activity, wholesale brokers which do not mediate individual risks and businesses providing services to them - pension management by insurers and third party providers of complaint handling/mis-selling reviews and claims handling. Companies potentially affected (as recipients or providers of services which are currently VAT exempt) include:

* General insurers
* Pure protection life offices
* Life companies conducting investment business
* Reinsurance companies
* London Market and other insurance brokers
* Other insurance intermediaries
* Outsourcing companies
* Claims handlers
* Lloyd's members' agents
* Lloyd's managing agents. 

For more information on VAT issues please contact Peter Mason on 020 7367 2209 or at peter.mason@cms-cmck.com or Nick Paul on 0207 367 2806 or at nick.paul@cms-cmck.com.  

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