VAT and outsourced insurance claims handling services

The ECJ has again confirmed that a narrow interpretation of the exemption for insurance activities is necessary in the context of outsourced services. In particular, in the Polish case, Minister Finansow v Aspiro (ECJ, 17 March 2016), the ECJ has confirmed that the extension of the exemption for other finance related services under the SDC caselaw (for acts which form a distinct whole and are characteristic and necessary for the relevant service) does not apply to the insurance exemption. As such, outsourced claims handling services cannot benefit from exemption unless performed by an insurance broker or agent (which requires involvement in bringing together insurers and persons seeking insurance).

The decision may bring a renewed focus on the current position in the UK, where it is openly recognised that UK law applies the exemption more widely, including allowing exemption for outsourced claims handling where not strictly allowed under the VAT Directives.

Background

Aspiro provided insurance settlement services to an insurance company. It performed these services in the name of the insurance company and on the basis of a contract with the insurance company. The services included, in particular, taking decisions on and settling substantive claims with persons holding insurance. However, they also extended to other administrative claims related services.

Aspiro argued that its services were exempt from VAT. It contended that these services constituted an element of an exempt insurance service which formed a distinct whole and was characteristic of and necessary for the performance of the exempt supply of insurance, in line with the ECJ decision in Sparekassernes Datacenter (SDC). In particular, the provisions of the Polish Law on VAT specifically incorporated the principle in SDC into domestic VAT law.

The Polish tax authorities accepted that the substantive claims settlement service was covered by the exemption but regarded the remaining services, although linked to the settlement of claims, as not constituting insurance services. As such, they did not benefit from the exemption, because they were of a technical and administrative nature and could be performed in the context of activities other than insurance services.

The Polish court upheld Aspiro’s appeal against this decision. In particular, the court held that, even if the exemption in the VAT Directive did not cover Aspiro’s services, the Polish domestic law went wider (by implementing the SDC principle in relation to insurance) and, as such, the Polish tax authorities could not rely on the narrower provisions of the VAT Directives. The Polish tax authorities appealed and the Polish courts referred to the ECJ questions over the scope of the insurance exemption.

Decision of the ECJ

The ECJ considered both the relevance of the SDC principle to the exemption for insurance transactions and the scope of the exemption itself for “related services”.

In relation to the SDC principle, the ECJ noted the significant difference in wording between the exemption in Article 135(1)(a) for insurance transactions and that under Articles 135(1)(d). The exemption in (d) is for transactions concerning accounts, payments etc. In contrast, the exemption in Article 135(1)(a) is only for insurance transactions in the strict sense. As such, as the court had already held, in Taksatorringen, that the SDC principle cannot be applied to the interpretation of the insurance exemption.

Instead, the insurance exemption extends also to “related services performed by insurance brokers and insurance agents”. On this point, it was clear that the services performed by Aspiro were related to insurance. The term “related” is sufficiently broad to cover different services connected with the performance of insurance transactions and, in particular, the settlement of claims.

However, to be an insurance broker or agent, it was necessary that a person should both (a) have a relationship with the insurer and insured and (b) perform activities which cover the essential aspects of the work of an insurance broker/agent, such as finding prospective clients and introducing them to the insurer. Aspiro was able to satisfy the first of these conditions as it had a direct relationship with the insurer and an indirect relationship with the insured (through the examination and management of claims) and an indirect relationship is sufficient in this context. However, Aspiro could not meet the second condition. The services performed by Aspiro did not relate in any way to the finding of prospective clients and their introduction to the insurer. As such, the services performed by Aspiro could not benefit from the insurance exemption.

Comment

The decision of the ECJ again confirms that the scope of the exemption for insurance and related services is narrower than other financial services. The broad extension of the other financial exemptions to outsourced activities which are discrete and essential to that financial service does not extend to insurance. In addition, the specific insurance exemption for “related services” is limited to “insurance agents and brokers” strictly defined. This again is a significant difference to the SDC principle, under which the identity of the service provider is irrelevant to the question whether the service qualifies for exemption.

In the UK, HMRC has held off implementing the earlier similar decision in Arthur Andersen, pending the wider EU Commission Review of VAT and Financial Services. In doing so, HMRC recognises that the UK exemption is wider than the strict EU position, but allows business to rely on the wider UK law, including allowing exemption for claims handling and the administration of contracts of insurance provided separately from introductory services. This latest ECJ decision may well bring a renewed focus on the UK position and place more pressure on HMRC to bring UK law into line with EU law, particularly since the wider review of VAT and Financial Services appears to have been in abeyance for quite some time.

In relation to this particular case, the ECJ is not the end of the road for Aspiro. As in the UK, it may well be able to succeed before the domestic courts on the basis that the Polish legislation goes wider than the strict EU position.