Two changes to EU VAT rules threaten the huge savings made by European insurers who have been off shoring much of their back office administrative processes to low-cost locations such as India. Services facing tax increases of upwards of 25% include: offshore administration, call centres, claims processing, accounting and finance etc.
These potential losses are the unintended consequence of attempts by Brussels to simplify VAT and curb billions of pounds lost to fraud.
EU VAT Package 2010
The first change is a European-wide shift in the rules on determining which country’s VAT rules apply when providing any back office service, the ‘place of supply’. From 1 Jan 2010, the place of supply changes from where the service is provided to where it is consumed. For example, for offshore insurance services provided from India, the VAT territory would now become the UK. The outcome of this would be the UK insurer having to account for the VAT bill. Since insurance and other financial services are exempt for VAT in Europe, this would leave the insurer with a big VAT irrecoverable cost of 17.5%, being the UK VAT rate from 2010. Given the high value of services now provided from India and elsewhere to the insurance market, this VAT would potentially run to several hundred million pounds for the insurers as a cost of off shoring.
The best organised insurers have tried to create VAT Grouping structures in the UK, whereby other related companies can offset this type of irrecoverable VAT liability stuck with the exempt insurer. However, this is also under threat too from the EU.
Brussels censers UK and others on VAT Grouping rules
The EU in Brussels, which sets the VAT rules for the region, is now targeting some of the abuses of the VAT Groupings rules which would undermine some of the strategies adopted above to help avoid unwanted VAT. In November 2009, the European Commission gave warning to the UK (Spain, Czech Republic, Ireland and Denmark) to change their rules.
This censurer from the EU in terms of insurance is the bringing into VAT Groups companies which are not fully bound to one another, a principle requirement of the EU VAT Directive, to enable the offsetting of VAT. This means that many insurers hoping to avoid the VAT losses on their off shoring activities which have arisen from the new EU VAT Package (above) will lose their main avoidance strategy.
Richard Asquith, MD of TMF VAT & IPT Services commented : the 2010 VAT Package has been a long time coming, and many insurers had been changing their offshore VAT arrangements in anticipation of potential cash losses from irrecoverable VAT. However, this new challenge to the VAT Grouping rules will undermine many of these efforts. It is likely that the UK will have to respond to the Commission by Spring, which gives little time for the insurers to recalibrate their business organisation.
