Third party insurance claims settling not VAT exempt, CJEU rules

Aspiro, a Polish company, had argued in the Polish courts that the services it provided fell within the VAT exemption for insurance and "related services performed by insurance brokers and insurance agents" set out in the EU's Sixth VAT Directive. However, the Court of Justice of the European Union (CJEU) ruled that the exemptions set out in the directive had to be interpreted "strictly" and could not be extended to cover the circumstances in this case.

Insurance tax expert Matthew Taylor of Pinsent Masons, the law firm behind Out-Law.com, said that the UK, which intervened in the case, was among the member states which would have to re-consider the way it taxed these transactions in light of the judgment.

"The relevant UK legislation includes within the exemption the provision of assistance in the administration and performance of such contracts, including the handling of claims and the collection of premiums," he said. "This is inconsistent with the judgments of the CJEU, and applies equally to long-term and general insurance business."

"Following the judgment in the Andersen case in 2005, there was some discussion of when, or indeed whether, the UK would amend the legislation. This has clearly not happened, but insurance companies have in many causes sought to anticipate the risk of legislative change by including in outsourcing contracts provisions either allocating the potential economic cost of VAT or providing a mechanism for agreeing an allocation if VAT became due. These provisions differ between contracts, so that in some cases the cost would fall largely on the administration company and others on the insurer," he said.

"The impact of a change would vary dependent on the terms of any anticipatory contractual provisions, and companies - both administration and insurers - may wish to negotiate new clauses or revisions to existing ones. Companies with long-term business may also have specific concerns in terms of the valuation of technical provisions and future profits since the expense assumptions would need to reflect any future economic cost from the change," he said.

Aspiro provided "comprehensive" insurance claims settlement services either itself or through an external sub-contractor, from receiving claims from customers to settling claims, archiving documents and handling appeals. However, it was not itself an insurer, broker or insurance agent and had no liability towards the insured parties. Its work was performed on the basis of a contract with the insurer, for which it was paid at a flat rate.

The company approached the Polish tax authorities for clarification about whether the claims settlement services it provided were exempt from VAT, on the grounds that they were "entirely related to the business of [the] insurance company and indispensable to it". When this was not forthcoming it took the minister to court, which referred the question to the CJEU.

Previous CJEU cases had established that exempt 'insurance transactions' could be carried out by companies that were not themselves insurers. However, the court found that this was not the case here, where the taxpayer "[did] not itself undertake to ensure that the insured person is covered in respect of a risk and is not connected in any way to the insured person through a contractual relationship. The second part of the exemption, which refers to 'related services', required those services to be of the type usually performed by insurance brokers and insurance agents and not merely administrative activities, it said.

"For the purpose of this examination, two conditions are required to be met," the court said in its judgment. "In the first place, the service provider must have a relationship with both the insurer and the insured party. That relationship can be only indirect if the provider is a sub-contractor of the broker or agent. In the second place, its activities must cover the essential aspects of the work of an insurance agent, such as the finding of prospective clients and their introduction to the insurer."

"The first of these conditions is met by a service provider such as Aspiro. That service provider is in a direct relationship with the insurance company, since it performs its activities in the name and on behalf of the insurance company, and it has an indirect relationship with the insured party, in the context of the examination and management of claims. On the other hand, as regards the second of those conditions … those services must be linked to the essential aspects of the work of an insurance broker or agent, which consists of the finding of prospective clients and their introduction to the insurer with a view to the conclusion of insurance contracts," it said.

Instead, the circumstances here were similar to those in the 2005 Anderson case, where the CJEU ruled that 'back office' activities did not fall within the exemption. In each of these cases, the services performed by the third party were "a division of the activities performed by insurance companies" rather than services carried out by an insurance agent, the court said.