Insurers expected to encounter tax issue in relation to business process outsourcing, expert warns

Accountancy firm KPMG and business operations analysts HfS Research said that the increase in finance and accounting business process outsourcing (F&A BPO) spend would continue into 2017 at a compound interest rate of 8%.

The findings of the research, which KPMG said covered 399 major global businesses and addressed 745 existing F&A "engagements", showed that businesses are meeting their "cost-reduction targets and initial delivery performance" in 90% of cases where F&A business processes have been outsourced.

Businesses are "overwhelmingly" focused on reducing costs and standardising their financial processes, KPMG said the research showed.

"Motivations to adopt F&A have reverted back to cost and standardization of process," the 'Finance and Accounting BPO Market Landscape 2013' report said. "While enterprise value innovation and analytical value, they want to get the basics right first. With 90% of BPO engagements meeting cost reduction and efficiency goals there is a host of enterprises now looking to augment of start their F&A BPO initiatives.

However, financial services expert John Salmon of Pinsent Masons, the law firm behind Out-Law.com, said that there is current uncertainty over a tax issue relating to outsourcing arrangements that could affect UK insurers' appetite to outsource F&A processing activities.

"The report confirms a general trend towards business process outsourcing in order to reduce costs," Salmon said. "For insurers though, the business case for outsourcing finance and accounting functions will remain uncertain until the HMRC outlines its approach to potential changes to UK insurance VAT exemption rules."

"In 2005 the Court of Justice [of the EU (CJEU)] effectively ruled that the UK exemption for insurance intermediaries was drawn too widely," he added. "HMRC held off making any changes to UK law pending the outcome of the EU Review of Financial Services exemptions. We understand that this project has effectively ceased as it seems that a compromise between member states cannot be achieved. We would therefore expect HMRC to begin acting to implement the CJEU ruling."

"Service providers who can demonstrate that their offerings are not purely cost-reduction focussed, but also enable customers to innovate and generate further business are the most likely to weather the VAT storm that may come," Salmon said.