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E.U. ruling on value added tax could touch British insurers

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The European Court of Justice’s finding that claims handling is not within the European Union’s value-added tax exemption for insurance-related services could have implications for British insurers.

The case involved Warsaw, Poland-based Aspiro S.A., formerly BRE Ubezpieczenia sp. z o.o. According to the court, Aspiro held that “the services that it performs, in the name and on behalf of an insurance company, on the basis of a mandate, constitute insurance services, within the meaning of Polish law. They form a distinct whole, entirely related to the business of that insurance company and indispensable to it, which does not pursue a purpose in itself. Aspiro submits that those services constitute a single supply of services, of complex nature, which must be exempted as a whole.”

“The Value Added Tax … in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services,” according to the European Commission’s website. Rates vary by nation and by goods and services.

The court, however, disagreed with that interpretation. Citing European Union directive, the court said that “the common system of value added tax must be interpreted as meaning that claims settlement services, such as those at issue in the main proceedings, provided by a third party in the name and on behalf of an insurance company, do not fall within the exemption laid down by that provision.”

The ruling could have implications for U.K. tax treatment of claims handling.

“The decision in this case highlights the clear difference between the expected VAT treatment of claims handling in U.K. and E.U. law,” said Richard Insole, direct tax partner at Deloitte L.L.P. in London in a statement. If the Her Majesty’s Revenue and Customs “are required to reassess their VAT position in this area, it could result in significantly increased operating costs for U.K. insurers and an impact on policy premiums as a result.”

“Exactly what HMRC intend to do next is not yet known, but our expectation is that following this decision, HM Revenue and Customs will come under increased pressure from the European Commission to change U.K. law,” he said.