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EU threatens 20% increase in outsourced claims handling costs

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The UK insurance industry is set for increased costs on outsourcing as other EU countries force through the removal of the VAT exemption on outsourced claims handling.  The UK’s HM Treasury is now preparing the industry for defeat on this concession in order to push forward a wider simplification of the insurance VAT rules.  This will mean a 20% increase in many outsourcing costs.

EU seeks to bring VAT rules up-to-date

The current rules on VAT for the insurance industry were drawn up in 1977.  These broadly exempt insurance and intermediary/broking services from VAT – meaning insurers or their service companies do not charge VAT.

However, as the industry has developed, many insurers have increasingly outsourced claims handling, accounting, IT etc., to reduce back-office costs.  As a result, a supply industry has grown up which is divorced from the VAT-exempt insurance activity.  Increasingly, this new sector has stretched the original scope of the exemption, and it has proved problematic to police.

The EU, which sets the European VAT rules, has therefore spent a number of years consulting on a new VAT law, or Directive, to more adequately reflect the modern industry.

UK insurance loses out

The UK has pushed for a wider scope on the new Directive, to extend the VAT exemption to all outsourced services.  However, this seems to have been thwarted by a number of Member States.  Many see the creation of an outsourcing industry as a prelude to offshoring jobs to low-cost countries outside of the EU.  They therefore have pushed to exclude much outsourcing from the new Directive.  HM Treasury, in communications with the UK industry, is now indicating that it may have to concede this issue in order to secure victories for other financial services in the VAT Directive.

Richard Asquith, MD of TMF VAT & IPT Services commented:

“This is going to create a big increase in costs for many UK insurers who have worked hard to contain operating expenses through outsourcing.  Whilst the Treasury is still seeking representations, it is likely that it will buckle to pressure from some of our EU partners – notably Germany – for gains elsewhere.  Insurers need to rapidly review their outsourcing strategy, especially as the planned 2011 VAT increase to 20% will now magnify this cash flow threat further.

Source : TMF Group Press Release