Out-Law Guide | 11 Mar 2008 | 10:54 am | 3 min. read
The scope of the VAT exemption for insurance brokers and agents has been a grey area for some time. Most recently, the Insurancewide case called into question the position of aggregator websites.
The European Commission is now proposing to redefine the exemption in a way that it hopes will result in less confusion and more consistency across all member states.
Insurance and reinsurance is exempt from VAT under article 135 of the Sixth VAT Directive. So are "related services provided by insurance brokers and insurance agents". No definition is given of broker or agent, nor of related services, although it is clear they must be insurance-related.
Insurance brokers tend to be relatively easy to identify. Agents can be more problematic because they can act in such a wide variety of roles.
In the UK, HM Revenue and Customs says it will recognise as an agent anyone who provides insurance-related services in an intermediary capacity, i.e. someone acting in between the provider of insurance and someone seeking to buy insurance or who is insured.
Under the VAT Act 1994, insurance-related services are defined as the bringing together of insurers and (prospective) insureds, carrying out work preparatory to the conclusion of insurance contracts, assisting in the administration and performance of such contracts and the collection of premiums.
In 2005, the decision of the European Court of Justice in the Arthur Andersen case narrowed the application of the exemption considerably.
The issue was whether various "back office" services provided by Arthur Andersen to a life insurance company were exempt from VAT. These included accepting applications, issuing, managing and cancelling insurance policies and managing claims. In carrying out these tasks, the company had authority to make decisions binding on the insurer.
The ECJ held that Arthur Andersen was not acting as an insurance broker because an essential characteristic of a broker is that he has complete freedom of choice of insurer for his client.
But nor was it acting as an insurance agent. An insurance agent must be instrumental in bringing the parties together. Without that, Arthur Andersen was merely assisting the insurer in carrying out various tasks the insurer would otherwise have to perform itself. The fact that it had authority to make decisions binding on the insurer was not necessarily the determining factor. The VAT exemption did not apply.
Following this decision, HMRC acknowledged that the UK exemption was too wide but postponed amending UK law until the European Commission completed a review of VAT and financial services.
HMRC has, however, shown that it is prepared to take a tough stance on the scope of the exemption.
Insurancewide.com Services Ltd provides a website portal through which customers can seek competing quotes for insurance and complete application forms through direct access to insurers. Commissions received by Insurancewide had been treated as VAT exempt on the basis that it was an insurance agent.
In October 2007, however, the London VAT Tribunal decided that the exemption requires the person to be both an insurance agent/broker and to be acting as an intermediary. Insurancewide had no authority to bind the insurer, which the tribunal found was one of the indicators of an agency relationship.
The following month, HMRC produced a Business Brief confirming that it does not intend to interpret the case as changing existing published practice. Nor does it see the decision as applying to all internet services.
But where the necessary criteria are met, some internet services may fall within the VAT exemption. "It is the arrangements between the parties and the nature of the services themselves that determines the VAT liability and not the means by which those services are delivered".
In circumstances (which might include certain affinity agreements) where the provider is clearly acting as agent of an insurer or insurers and plays a more active role in arranging the policies than mere introduction, the VAT exemption will continue to apply.
In November 2007, the European Commission adopted proposals to modernise the VAT regime for insurance and financial services.
These include amending the exemption to cover "intermediation", which is defined as "the supply of services rendered to, and remunerated by, a contractual party as a distinct act of mediation in relation to the insurance…transaction …by a third party intermediary".
The Commission hopes that this will disentangle the exemption from member states' localised (and often inconsistent) interpretations of the roles of brokers and agents. But the proposal will need to be agreed unanimously by all member states before it can come into effect. The Treasury estimates this could take between three and five years.
Contact: John Christian [email protected] (0113 294 5296)
See: HMRC Business brief