CONSULTATION ON CHANGES TO THE
VAT EXEMPTION FOR INSURANCE-
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1.1 This consultation exercise concerns the UK VAT exemption for insurance-
related services, and the judgment of the European Court of Justice (ECJ) in the
case of Arthur Andersen & Co Accountants (C-472/03), which was released on 3
March 2005. The case, which was referred to the ECJ by the Netherlands Supreme
Court, concerned the VAT liability of certain ’back office’ services provided by
Andersen Consulting Management Consultants (ACMC) to a life insurance company.
1.2 The question put to the ECJ was whether such back office activities carried
out for an insurance company were exempt from VAT under Article 13B(a) of the
Sixth Directive as “related services performed by insurance brokers and insurance
agents”. The ECJ found that ACMC were neither insurance brokers nor insurance
agents for the purposes of the VAT exemption and their services therefore fell to be
liable to VAT at the standard rate.
1.3 The implications of the judgment are that the UK VAT exemption for
insurance-related services in Group 2 of Schedule 9 to the VAT Act 1994 is currently
drawn too widely. It needs to be amended to bring it into line with the judgment.
1.4 Implementation of the judgment will lead to VAT becoming chargeable on
many of the outsourced insurance-related services currently provided to insurers.
Where insurers use these outsourced services to provide exempt insurance services
within the EU, this VAT will be irrecoverable.
Objectives and scope of consultation
1.5 ECJ judgments are binding on Member States, so UK law must be amended
to bring the scope of the UK VAT exemption into line with the exemption provided
under EU law as outlined by the ECJ in the Andersen case. The purpose of this
consultation, therefore, is to seek views on:
· how the Andersen judgment is to be implemented in the UK;
· the proposed changes to UK legislation;
· the timing of implementation; and
· the impact implementation is likely to have on UK industry and
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1.6 HMRC is particularly keen to hear from trade bodies and associations in the
insurance and outsourcing industries, as well as individual businesses in those
industries and their advisers, to obtain their views, identify concerns and gather
information about their activities and the impact the revised UK VAT exemption will
have on them. This consultation paper will be sent to the organisations listed at
Annex B, but HMRC would also welcome contributions and views from other
interested bodies. Questions are asked in each of the sections of this document and
are also shown separately at Annex A
Responding to this consultation
1.7 Responses should be made to HMRC by 30 September 2005, and should be
Mr Peter McBride
HM Revenue & Customs
Financial Services (VAT & IPT) Team
100 Parliament Street
LONDON SW1A 2BQ
Fax: 020 7147 0456
1.8 To help evaluate responses, it would be useful if respondents explain their
interest in the subject and make it clear if they are responding on behalf of a group or
1.9 This consultation is conducted in accordance with the Government’s Code of
practice on written consultations www.cabinet-office.gov.uk
1.10 Please note -
HMRC, together with all other Government Departments, is subject to the Freedom
of Information Act 2000, which imposes an obligation on us to disclose information
upon request. There are a limited number of exemptions that will allow us to withhold
information but applicants may appeal against our decision to apply an exemption to
independent bodies, including the Information Commissioner, Information Tribunals
and the Courts, any one of whom may overturn our decision. Thus all information in
responses, including personal information, may be subject to publication or
disclosure under the Act.
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If a correspondent requests confidentiality, this cannot be guaranteed and will only be
possible if considered appropriate and is consistent with our obligations under the
Act. Any such request should explain why confidentiality is necessary. Please note
that any automatic confidentiality disclaimer generated by your IT system will not be
considered as such a request unless you specifically request confidentiality, together
with an explanation of why you consider confidentiality to be necessary, in the main
text of your response.
We may, acting in accordance with the Lord Chancellor's Code of Practice on the
Discharge of Functions of Public Authorities Under Part 1 of the Act, be obliged
under the Act to disclose information without consulting you or following consultation
with you and having taken your views into account.
1.11 Any queries or requests for additional copies of this document, or a Welsh
language version, should be directed to the address shown above.
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2. HOW THE JUDGMENT WILL BE
IMPLEMENTED IN THE UK
The ECJ decision
2.1 ACMC used insurance-trained personnel to undertake most of the activities
related to insurance on behalf of the insurer. This included the issuing, administration
and cancellation of policies, the management of claims, the provision of management
information and, in most cases, the taking of decisions that bound the insurer to enter
into insurance contracts.
2.2 To fall within the VAT exemption, ACMC had to qualify as either insurance
brokers or insurance agents. The ECJ held that ACMC:
· were not insurance brokers, because the essential characteristic
of insurance brokers is that they have complete freedom as to
choice of insurer for their clients; and
· were not insurance agents because, although insurance agents
may be tied to a particular insurer, an essential characteristic is
that they find prospective customers and introduce them to that
The ECJ found that, as ACMC did not qualify on either count, their services were
taxable at the standard rate.
2.3 The ECJ also said that the performance by ACMC of activities normally carried
out by the insurer did not constitute the performance of the services of an insurance
agent or broker. By analogy with the CSC Financial Services1 decision, an insurance
agent or broker does not just carry out the same activities as the insurer (which is
itself a party to a contract of insurance), but must carry out the independent function
of bringing the parties to the insurance contract together.
2.4 The judgment makes it clear, therefore, that a service only falls within the VAT
insurance exemption when it is both insurance-related and performed by an
insurance agent or broker. Insurance agents are defined, not in terms of their
regulatory or professional status, but by reference to the nature of the services they
2.5 Furthermore, the ECJ states that, whilst many tied insurance agents may have
the power to bind the insurer to enter into contracts of insurance, this is not of itself
sufficient to bring them within the VAT exemption; the essential elements, outlined in
paragraphs 2.2 and 2.3, must still be present.
Case C-235/00 paragraph 40 referred to for analogy in the Andersen judgment at paragraph 38
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The current UK exemption for insurance-related services
2.6 At present, the UK exemption for insurance-related services is drawn more
widely than the exemption in the Sixth Directive, as outlined by the ECJ in the
Andersen judgment. Current UK law exempts policy administration and claims
handling services even when their provider has played no part in the arrangement of
the policies in question; a copy of the current UK VAT law covering the insurance
exemption can be found at Annex C.
2.7 Furthermore, over the years, the UK courts have ruled on the interpretation of
various aspects of the exemption for insurance-related services. In particular they
have found that exemption extended not just to collecting premiums and amending
and updating policies, but also such things as pension mis-selling review services
and providing legal claims help-lines.
2.8 In addition to this, a tribunal recently found that the power to put an insurer
“on-risk” was a key factor in bringing the services provided by a call centre into the
scope of the exemption. Following this decision, Customs (now HMRC) accepted2
that an intermediary’s power to bind an insurer to enter a contract of insurance was
sufficient to bring their services into the VAT exemption.
2.9 However, the ECJ judgment has now set out essential characteristics of the
services of insurance agents and brokers which effectively overrule these decisions.
UK law will therefore be updated to reflect the Andersen decision.
How it is proposed the UK VAT exemption for related
services will change
2.10 The current insurance-related services exemption is not dependent upon the
professional or regulatory status of the service provider. This will not change but,
following the implementation of the Andersen judgment in the UK, exemption for
insurance-related services will depend upon the provider meeting the criteria for
being an insurance agent or broker as laid down by the ECJ.
2.11 To qualify for VAT exemption as an insurance agent or broker, therefore, a
provider will need to be supplying services that include the essential elements, which
· finding prospective customers and introducing them to an insurer
(in the case of brokers, having complete freedom as to choice of
insurer for their clients), and
· in doing so, be carrying out a function of intermediation by virtue
of their independent status (for example, negotiating the terms
and conditions of an insurance contract without having any
interest of their own in its terms).
Business Brief 7/03 in respect of Teletech (VTD 18080)
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2.12 Where a provider meets the criteria outlined above, and is therefore acting as
an insurance agent or broker for the purpose of the VAT exemption, and as part of a
single supply also goes on to administer the policies they have arranged and handle
claims made under them, the whole supply will fall within the VAT exemption.
2.13 It will not be necessary for the provider itself to have direct contact with the
customer when introducing an insured to an insurer. Exemption will still apply to
supplies in cases where the provider sub-contracts the introductory service to a sub-
agent, so that there is a direct contractual link between the principal agent and the
agent that has the direct contact with the prospective customer.
2.14 As is currently the case, it will not follow that because a provider qualifies as
an insurance agent or broker in respect of services performed under one or more
contracts, they will qualify in respect of all services performed. Each supply of
services will need to be considered in its own right.
2.15 Services affected by the judgment are only those which currently benefit from
the exemption for insurance-related services where the provider is not acting as an
agent or broker as defined by the judgment. The decision does not affect the
exemption for insurance and reinsurance transactions (item 1 of group 2 of Schedule
9 to the VAT Act 1994) nor the exemption for financial services under group 5 of
Question 1. Do you agree with our interpretation of the Andersen judgment? If
not, please explain why you disagree and provide an alternative interpretation
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3. CHANGES TO UK LAW
Current UK Law
3.1 The UK law which implements Article 13B(a) of the EC Sixth VAT Directive is
Group 2 of Schedule 9 to the VAT Act 1994. Item 4 of Group 2 provides the
exemption for insurance-related services performed by insurance agents and brokers
and was introduced in its current form in 1997. Definitions and other provisions
affecting interpretation are to be found in notes (1) to (10) to Group 2. A copy of the
current UK law can be found at Annex C.
3.2 With the exception of notes (3) to (6), the notes to Group 2 are intended to
explain the parameters of the exemption for insurance-related services and clarify
areas where there may be some uncertainty. Item 4 exempts “the services of an
insurance intermediary”. Note (1) lists the services which qualify as those of an
insurance intermediary. In addition to introductory services, the exemption applies to
the following services both when they are supplied as a package or in their own right:
· work preparatory to the conclusion of contracts of insurance or
· the provision of assistance in the administration and performance
· the handling of claims, and
· the collection of premiums.
3.3 Notes (3) to (6) set out the requirement, in certain circumstances, to disclose
premiums and separate fees charged by brokers and agents and were introduced as
a specific anti-avoidance measure. These requirements came in for some criticism
from Lord Hoffman in the House of Lords decision in the case of C R Smith Glaziers
3.4 There has also been criticism by other UK courts of the complexities of the UK
insurance exemption and in particular the contrast between its “cloud of rules and
notes” and the “pithy primary source” of the Sixth VAT Directive (see in particular
paragraphs 6-8 of the Court of Appeal decision in Century Life plc4).
STC 419 (2003) (UKHL 7)
STC 38 (2001)
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Proposed amendments to UK Law
3.5 We are proposing, therefore, to adopt a different approach to the drafting of
the exemption for insurance-related services. Item 1 of Group 2 was amended (and
Items 2 and 3 deleted) in January 2005 to implement the judgment of the ECJ in
Card Protection Plan Ltd5. As a result, this part of the law effectively reproduces the
wording found in the Sixth Directive. It is proposed that a similar approach should be
taken to the amendment of Item 4 of Group 2.
3.6 The proposal to remove the notes to Group 2 altogether is partly in response
to the criticisms raised by the UK courts, as outlined in paragraphs 3.3 and 3.4
above, and by their tendency in this area to refer primarily to EU rather than UK law
when making their decisions. It is also felt that, given the clear guidance provided by
the ECJ in the Andersen judgment on the scope of the related services exemption, it
is no longer necessary to have the same level of detail in the law as previously.
3.7 In addition, it is felt that the disclosure requirements in notes (3) – (6) have
become superfluous in the light of the new regulatory requirements for businesses
selling general insurance that came into effect on 1 January this year (similar
requirements already exist for investment products, including life, pension and
3.8 A draft of how the proposed legislation will look following the changes can be
found at Annex D. It is our intention that the law itself will effectively replicate the
wording of the Sixth Directive. A minor change has also been made to Item 1 to align
it even more closely with the wording of the Directive. Detailed guidance on the
scope and application of the revised law will be published in Notice 701/36,
Insurance, and in V1-7(17). A draft of how the revised V1-7(17) guidance on
insurance-related services may look is included at Annex E.
Amendment to the VAT (Input Tax)(Specified Supplies)
3.9 This Order6 specifies those supplies of services which, despite being exempt,
qualify for related input tax deduction as if they were taxable supplies. This is subject
to certain conditions, particularly that the customer belongs outside the EU. Article
3(c) of the Order refers to the intermediary services mentioned in item 4 of the
insurance exemption. If item 4 is amended as proposed, a consequential amendment
to this Order will be needed. Any supplies that cease to be exempt will become
taxable and the Order does not need to (and should not) specify these supplies in
order to allow related input tax recovery.
Question 2. Do you have any comments on the proposed approach to the
changes to UK law?
SI 1999/3121 the VAT (Input Tax)(Specified Supplies) Order 1999
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Question 3. Do you have any comments on the substance of the draft
guidance on changes to the VAT liability in the UK of certain insurance-related
services, following the Andersen decision, included at Annex E?
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4. TIMING OF IMPLEMENTATION
Proposed implementation date
4.1 The proposed amendments to the legislation are to be made by Treasury
Order. The current intention is for the changes to come into effect on 1 January 2006.
The Order amending Group 2 will be made and laid before the House of Commons
and will be subject to Parliamentary scrutiny under the affirmative resolution
procedure. It is not necessary for the changes to be made as part of the Budget
timetable, although Ministers may want to confirm or announce a change to the
proposed timing, following this consultation, in the Pre-Budget Report.
4.2 The rules and special provisions covering a change in VAT liability, as set out
in section 30 of Notice 700 The VAT Guide, will apply in respect of tax points and
contracts for affected supplies.
European Commission review of VAT and financial
4.3 The European Commission has announced that it intends to conduct a
strategic review of VAT and financial services. It is possible that this review could
result in changes being made to the scope of the current EU exemption for insurance
4.4 It has been suggested to us that any changes to the UK law as a result of the
Andersen judgment should be delayed, pending the outcome of this review. We have
rejected this approach as no timetable has been set for the review and there is no
certainty as to the issues it will address. Also, even if, or when, any proposed
changes to EU law arising from the review are agreed between Member States, there
is no guarantee that they will impact on the Andersen judgment.
4.5 We understand, however, that the review is likely to include industry
consultation. If so, there will be the opportunity for businesses to make their views
known as part of that process in due course. The UK Government will also wish to
take full account of the views of UK business in developing its approach to the
Question 4. Does the proposed implementation date of 1 January 2006 give
you any practical difficulties e.g. renewal dates of contracts? Please provide
actual examples where possible.
Question 5. If so, what sort of transitional provisions would assist in
alleviating the difficulties?
Question 6. Are there any other specific factors which you feel might support
an alternative implementation date? Please supply details.
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5. IMPLICATIONS FOR UK INDUSTRY AND
5.1 We need to know what the impact on UK businesses and policyholders will be
if the interpretation of the Andersen judgment outlined in section 2 of this document is
adopted. In order to enable us to assess the impact of the changes properly, it will be
helpful to receive as much clear, evidence-based information as possible.
Impact of increased VAT cost for UK insurers
5.2 Insurance companies that buy in (outsource) affected services will face an
increase in their irrecoverable VAT. Our discussions with industry representatives
suggest that this could lead to companies adopting a number of courses of action,
(although it has been pointed out that, in the case of closed funds, the options are
likely to be limited):
· absorb the increased costs with a consequent impact on profits
(offset to an extent by additional relief from corporation tax);
· pass the cost on to consumers by increasing premiums;
· pass the cost on to consumers by lower returns on e.g. paid-up
· bring outsourced services in-house;
· switch to offshore outsource providers.
· change the nature of the services that are outsourced so that
they continue to fall within the VAT exemption.
5.3 In responding to the following questions, which are focused on insurance
companies, we would ask you to consider all other relevant factors, as well as the
VAT cost, that play a part in such decisions and state what these factors are where
Question 7. Which of the courses of action suggested in paragraph 5.2 above
is the most likely scenario for your business(es) and why?
Question 8. If more than one approach might be applicable (for example, if
this depends on the type of services received or if closed funds are involved)
could you provide details and the reasons why?
Question 9. Are any other courses of action likely for affected businesses? If
so, please provide details and reasons why?
Question 10. If you are an insurance company, how much additional
irrecoverable VAT would you expect to incur, without taking account of any of
the above courses of action?
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Question 11. How much of that irrecoverable VAT do you expect to pass on to
your policyholders in the form of increased premiums or lower returns?
Question 12. Will there be any VAT implications for structures that are set up
to facilitate the sale of insurance products (such, as ‘networks’) and, if so,
5.4 It has also been suggested to us that the changes will reduce the
competitiveness of UK insurers in the international market for UK or EU customers
because they will be bearing an additional cost not applicable to non-EU insurers. UK
(and other EU) insurers already bear irrecoverable VAT. We are therefore looking to
assess only the impact of the increase in irrecoverable VAT due to the proposed
changes arising from the Andersen judgment.
Question 13. To what extent do you think competitiveness of UK insurers is a
real issue in practice, and why?
Question 14. Can you provide examples e.g. comparative premiums where the
VAT cost might tip the balance in favour of an overseas competitor?
Impact on providers of outsourced services
5.5 If you are a business providing outsourced services you will be able to recover
all the VAT you incur in making the supplies on which VAT becomes chargeable as a
result of the proposed changes, which will reduce the costs you have to bear. If
insurance companies adopted some of the options outlined above, however, this
could lead to a loss of business.
Question 15. If you are a provider of outsourced services, what do you think
the likely impact on your business will be? Please provide specific details
including estimates of lost (or gained) income where possible.
Impact on cross border transactions
5.6 Following the proposed changes, the services affected by the Andersen
judgment will no longer fall within the VAT exemption nor, therefore, within the scope
of the VAT (Input Tax)(Specified Supplies) Order 1999 (see paragraph 3.9). Their
VAT treatment will also depend on the normal rules relating to place of supply of
5.7 Those affected services which are currently treated as supplied where
received as insurance procurement services under paragraph 8, Schedule 5 to the
VAT Act 1994 will no longer fall within that treatment. The place of supply of such
services will ultimately depend on the exact nature of the service provided and to
whom. However, in most cases they will fall to be treated under the basic rule as
supplied where the supplier belongs. Full details of the provisions for the place of
supply of services are contained in Notice 741.
Question 16. Will you suffer a VAT cost as a direct result of the change in
status of cross-border supplies? Please provide details, including an estimate
of the cost.
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Question 17. Will the place of supply rules influence any of the courses of
action referred to in paragraph 5.2? Please provide details.
5.8 As well as the VAT implications of the changes, we also need to consider the
regulatory impact e.g. any additional administrative costs arising from the need to
make changes to accounting systems. Based on the numbers of affected businesses
and the fact that most have systems in place to accommodate multiple VAT liabilities,
our early view is that the regulatory impact is not likely to be significant in terms of
cost. We would, however, like to invite views on this aspect of the proposed changes.
A partial regulatory impact assessment (RIA) is appended at Annex F.
Question 18. Will you incur significant administrative costs (one-off and/or
continuing) as a direct consequence of the proposed changes? If so, please
explain and provide an estimate of the additional cost likely to be incurred.
Question 19. Are any of these increased costs attributable to one of the
courses of action referred to in paragraph 5.2 above? If so, please explain.
Question 20. Will any reduction in administrative costs be attributable to one
of the courses of action referred to in paragraph 5.2 above? If so, please
explain and provide an estimate of the likely reduced cost.
Question 21. Do you have any further comments on the partial RIA?
5.9 As well as incurring additional costs, we are aware that there may be other
difficulties arising from the proposed changes. For example, industry representatives
have already expressed concerns about the practicalities of identifying whether or not
services supplied fall to be exempt. This may occur, for example, where a business
provides policy administration services and introduction services but may not have
introduced the insured to the insurer in respect of all the policies administered.
5.10 Some companies, which are run by or for the benefit of a third party, and are
currently in insurers’ VAT groups may cease to be eligible to remain in the VAT group
as a result of these changes because they will become “specified bodies” for the
purposes of the VAT (Groups: Eligibility) Order 20047. This will apply where they are
currently only making exempt supplies but, following the changes, will be making
taxable supplies (or supplies that would be taxable if they were not made to another
group member), and the other conditions of the Order are met.
Question 22. Please comment on any practical difficulties you are likely to
incur. Please provide specific examples where possible.
Question 23. Are you likely to be affected by the issue outlined in paragraph
5.10? If so, how will this impact on your business?
SI 2004/1931 Article 4
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Question 24. Please provide details of any other implications the
implementation of the Andersen judgment is likely to have.
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Summary of questions
HOW THE JUDGMENT WILL BE IMPLEMENTED IN THE UK
Question 1. Do you agree with our interpretation of the Andersen judgment? If not,
please explain why you disagree and provide an alternative interpretation where
CHANGES TO UK LAW
Question 2. Do you have any comments on the proposed approach to the changes
to UK law?
Question 3. Do you have any comments on the substance of the draft guidance on
changes to the VAT liability in the UK of certain insurance-related services, following
the Andersen decision, included at Annex E?
TIMING OF IMPLEMENTATION
Question 4. Does the proposed implementation date of 1 January 2006 give you any
practical difficulties e.g. renewal dates of contracts? Please provide actual examples
Question 5. If so, what sort of transitional provisions would assist in alleviating the
Question 6. Are there any other specific factors which you feel might support an
alternative implementation date? Please supply details.
IMPLICATIONS FOR UK INDUSTRY AND POLICY HOLDERS
Question 7. Which of the courses of action suggested in paragraph 5.2 above is
the most likely scenario for your business(es) and why?
Question 8. If more than one approach might be applicable (for example if this
depends on the type of services received or whether closed funds are involved) could
you provide details and the reasons why?
Question 9. Are any other courses of action likely for affected businesses? If so,
please provide details and reasons why?
Question 10. If you are an insurance company, how much additional irrecoverable
VAT would you expect to incur, without taking account of any of the above courses of
Question 11. How much of that irrecoverable VAT do you expect to pass on to your
policyholders in the form of increased premiums or lower returns?
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Question 12. Will there be any VAT implications for structures that are set up to
facilitate the sale of insurance products (such, as ‘networks’) and, if so, how?
Question 13. To what extent do you think competitiveness of UK insurers is a real
issue in practice, and why?
Question 14. Can you provide examples e.g. comparative premiums where the VAT
cost might tip the balance in favour of an overseas competitor?
Question 15. If you are a provider of outsourced services, what do you think the
likely impact on your business will be? Please provide specific details including
estimates of lost (or gained) income where possible.
Question 16. Will you suffer a VAT cost as a direct result of the change in status of
cross-border supplies? Please provide details, including an estimate of the cost.
Question 17. Will the place of supply rules influence any of the courses of action
referred to in paragraph 5.2? Please provide details.
Question 18. Will you incur significant administrative costs (one-off and/or
continuing) as a direct consequence of the proposed changes? If so, please explain
and provide an estimate of the additional cost likely to be incurred.
Question 19. Are any of these increased costs attributable to one of the courses of
action referred to in paragraph 5.2 above? If so, please explain.
Question 20. Will any reduction in administrative costs be attributable to one of the
courses of action referred to in paragraph 5.2 above? If so, please explain and
provide an estimate of the likely reduced cost.
Question 21. Do you have any further comments on the partial RIA?
Question 22. Please comment on any practical difficulties you are likely to incur.
Please provide specific examples where possible.
Question 23. Are you likely to be affected by the issue outlined in paragraph 5.10? If
so, how will this impact on your business?
Question 24. Please provide details of any other implications the implementation of
the Andersen judgment is likely to have.
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List of recipient organisations
Association of British Insurers
Investment & Life Assurance Group
Association of Independent Financial Advisers
British Insurance Brokers Association
Lloyds of London
International Underwriters Association
SIPP Provider Group
Confederation of British Industry
Chartered Institute of Taxation
Institute of Indirect Taxation
British Bankers Association
London Investment Banking Association
Institute of Chartered Accountants England & Wales
Institute of Chartered Accountants Scotland
Association of Chartered Certified Accountants
Association of Chartered Certified Accountants Scotland
The Law Society
Page 18 of 33
Page 19 of 33
Current legislation – Group 2, Schedule 9 to the VAT Act
GROUP 2 – INSURANCE
1. Insurance transactions and reinsurance transactions.
4. The provision by an insurance broker or insurance agent of any of the services of
an insurance intermediary in a case in which those services-
(a) are related (whether or not a contract of insurance or reinsurance is finally
concluded) to an insurance transaction or a reinsurance transaction; and
(b) are provided by that broker or agent in the course of his acting in an
(1) For the purposes of item 4 services are services of an insurance intermediary if
they fall within any of the following paragraphs-
(a) the bringing together, with a view to the insurance or reinsurance of risks, of-
(i) persons who are or maybe seeking insurance or reinsurance, and
(ii) persons who provide insurance or reinsurance;
(b) the carrying out of work preparatory to the conclusion of contracts of insurance
(c) the provision of assistance in the administration and performance of such
contracts, including the handling of claims;
(d) the collection of premiums.
(2) For the purposes of item 4 an insurance broker or insurance agent is acting “in
an intermediary capacity” wherever he is acting as an intermediary, or one of the
(a) a person who provides insurance or reinsurance, and
(b) a person who is or may be seeking insurance or reinsurance or is an insured
Page 20 of 33
(a) a person (“the supplier”) makes a supply of goods or services to another (“the
(b) the supply of the goods or services is a taxable supply and is not a zero-rated
(c) a transaction under which insurance is to be or may be arranged for the
customer is entered into in connection with the supply of the goods or services,
(d) a supply of services which are related (whether or not a contract of insurance
is finally concluded) to the provision of insurance in pursuance of that transaction is
(i) the person by whom the supply of the goods or services is made, or
(ii) a person who is connected with that person and, in connection with the
provision of that insurance, deals directly with the customer,
(e) the related services do not consist in the handling of claims under the contract
for that insurance,
those related services do not fall within item 4 unless the relevant requirements are
(4) For the purposes of Note (3) the relevant requirements are-
(a) that a document containing the statements specified in Note (5) is prepared;
(b) that the matters that must be stated in the document have been disclosed to
the customer at or before the time when the transaction mentioned in Note (3)(c) is
entered into; and
(c) that there is compliance with all such requirements (if any) as to-
(i) the preparation and form of the document,
(ii) the manner of disclosing to the customer the matters that must be stated
in the document, and
(iii) the delivery of a copy of the document to the customer,
as may be set out in a notice that has been published by the Commissioners and has
not been withdrawn.
(5) The statements referred to in Note (4) are-
Page 21 of 33
(a) a statement setting out the amount of the premium under any contract of
insurance that is to be or may be entered into in pursuance of the transaction in
(b) a statement setting out every amount that the customer is, is to be or has
been required to pay, otherwise than by way of such a premium, in connection with
that transaction or anything that is to be, may be or has been done in pursuance of
(6) For the purposes of Note (3) any question whether a person is connected with
another shall be determined in accordance with section 839 of the Taxes Act.
(7) Item 4 does not include-
(a) the supply of any market research, product design, advertising, promotional or
similar services; or
(b) the collection, collation and provision of information for use in connection with
market research, product design, advertising, promotional or similar activities.
(8) Item 4 does not include the supply of any valuation or inspection services.
(9) Item 4 does not include the supply of any services by loss adjusters, average
adjusters, motor assessors, surveyors or other experts except where-
(a) the services consist in the handling of a claim under a contract of insurance or
(b) the person handling the claim is authorised when doing so to act on behalf of
the insurer or reinsurer; and
(c) that person’s authority so to act includes written authority to determine
whether to accept or reject the claim and, where accepting it in whole or part, to
settle the amount to be paid on the claim.
(10) Item 4 does not include the supply of any services which-
(a) are supplied in pursuance of a contract of insurance or reinsurance or of any
arrangements made in connection with such a contract; and
(b) are so supplied either-
(i) instead of the payment of the whole or any part of any indemnity for which
the contract provides, or
(ii) for the purpose, in any other manner, of satisfying any claim under that
contract, whether in whole or in part.
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Proposed legislation following amendment to Group 2,
Schedule 9 to the VAT Act 1994
GROUP 2 – INSURANCE
1. Insurance and reinsurance transactions.
2. The provision by insurance brokers and insurance agents of services related to
insurance and reinsurance transactions.
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1. Insurance related services
1.1 Purpose and outline of the section
This section covers the VAT treatment of supplies of insurance-related services by
insurance brokers and insurance agents. It specifically deals with Item 4 of Group 2,
and gives interpretations and definitions of the terminology used in the legislation. In
particular it covers:
· what constitutes an insurance-related service for the purposes of
Group 2; and
· what is an insurance broker or agent for the purposes of Group
1.2 EC and UK VAT legislation
The VAT exemption for insurance-related services is derived from Article 13(B)(a) of
the EC Sixth Directive. It is found in UK legislation in Item 4 to Group 2 of Schedule 9
to the VAT Act 1994. Item 4, which had last been amended by the Finance Act 1997
with effect from 19 March 1997, was amended again on [1 January 2006] to bring it
into line with the ECJ judgment in the case of Arthur Andersen & Co Accountants
1.3 Services that are insurance related
Article 13B(a) of the Sixth VAT Directive exempts “insurance and reinsurance
transactions, including related services performed by insurance brokers and
insurance agents”. The term “related services” is not defined in law, but it is clear that
the services must be related to insurance and reinsurance transactions.
However, the wording of Article 13B(a) shows that not all insurance-related services
are exempt. EC law further restricts the scope of the exemption to include only those
related services that are performed by insurance brokers or agents. The definition of
the person claiming the exemption as an insurance broker or agent is therefore a key
factor in determining those related services which are exempt under Article 13B(a).
1.4 Insurance brokers and insurance agents
In the Andersen judgment, the ECJ effectively defined both insurance brokers and
insurance agents for the purposes of EC VAT law.
The ECJ found that:
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· The essential characteristic of insurance brokers is that they
have complete freedom as to choice of insurer for their clients.
· The essential characteristic of insurance agents is that, although
they may be tied to one or more particular insurers, they find
prospective customers and introduce them to those insurers.
· To be an insurance agent or broker, a business must not be
carrying out only subcontracted activities on the insurer’s behalf
which insurers normally perform for themselves, but it must be
carrying out the independent function of bringing the parties to
the insurance or reinsurance contract together.
For the purposes of the VAT exemption, therefore, brokers and agents are defined in
terms of what they do rather than by their professional or regulatory status. In
addition to professional insurance brokers and agents, it is possible for businesses
such as retailers, estate agents, and car rental companies that sell insurance in
connection with the goods or services they supply to meet the conditions for
exemption outlined above.
However, it does not follow that because a business qualifies as an insurance agent
or broker in respect of one supply it qualifies in respect of all its supplies; each supply
of services needs to be considered in its own right.
Where a provider is acting as an insurance broker or agent in respect of a particular
supply, other insurance-related services can be included within the scope of the
exemption if they form part of that supply. These services are described in paragraph
1.6 and 1.7 below.
1.4.1 EC regulation of insurance brokers and agents
The EC Insurance Intermediaries Directive (Council Directive 77/92) was introduced
as a means of facilitating trade across EC borders and gives a general description of
the activities of insurance agents and brokers for regulatory purposes. On 30
September 2002 the EC Insurance Mediation Directive (Council Directive 2002/92)
came into effect and, as a result, UK general insurance sales became subject to
government regulation from 1 January 2005.
The definitions of the services of insurance brokers and agents contained in the
Intermediaries Directive has often been used by the courts as a guide to determining
the scope of the VAT exemption for related services performed by insurance agents
and brokers. However, it is important to note that in the Andersen judgment the ECJ
made it clear that the Intermediaries Directive definitions do not determine the status
of a business as insurance agent or broker for the purposes of the VAT exemption.
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1.4.2 Insurance involving more than one broker or agent
It is possible for more than one party to become involved in procuring a specific
supply of insurance. For example, an agent or small broker may need to use a broker
with a significant presence in the market in order to place a particular risk, or the
original broker (the producing broker) may use another broker who specialises in a
particular class to place the business (the placing broker). Each agent or broker in
the chain may claim the exemption for their supplies, provided the criteria set out in
this guidance relating to exemption for related services are met in relation to each
supply and there is a direct contractual link between the principal agent contracting
with the insurer through any intervening agents to the agent that has the direct
contact with the prospective customer.
1.5 Introductory services
The services of introduction are exempt when they consist of carrying out the
independent function of finding prospective customers and bringing them together
with an insurer with a view to the insurance or reinsurance of risks. It is necessary for
a business to be both prospecting for customers and introducing those customers to
the insurer. It is not necessary, however, for an insurance contract to be concluded in
all cases. Exemption will apply in cases where no contract is entered into as long as
both prospecting and attempted introduction have taken place.
1.5.1 Carrying out an independent function
The performance of activities normally carried out by the insurer alone does not
constitute the performance of the services of an insurance agent or broker. The
agent or broker must be acting independently of the insurer in doing something that it
is not possible for the insurer (or someone acting ‘in the shoes of’ the insurer) to do
itself. As part of its introductory services, therefore, an agent or broker must be
carrying out the functions necessary for two parties to enter into a contract of
insurance (such as, the negotiation of terms and conditions) without having any
interest of his own in the terms of the contract.
1.5.2 Borderline between advertising and introductory services
The provision of advertising services alone does not qualify the provider for VAT
exemption. For example, it may be argued that the service of sending out mail-shots
selling insurance is an exempt introductory service because the provider is
prospecting for customers and introducing the insurer to the prospective insured.
In such cases, it is important to bear in mind that exemption applies only where a
business is carrying out an independent function that an insurer would not normally
carry out itself. Advertising services alone would not fall within the VAT exemption,
therefore, because there is no element of intermediation as explained in paragraph
1.5.1 above. However, where advertising services are ancillary to the provision of
introductory services performed by the insurance agent, they will form part of the
single exempt supply.
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1.5.3 Power to bind
Prior to the judgment in Andersen, we accepted that the power to bind the insurer to
the insured was sufficient in itself to bring the services of an intermediary within the
VAT exemption. The Andersen ECJ judgment made clear, however, that the power
to bind is a possible function of an insurance agent or broker, but does not itself
determine such status for VAT purposes.
1.5.4 Call centres selling insurance
The former policy on the power to bind explained in the previous paragraph stemmed
from a tribunal decision concerning the VAT liability of call centre services involving a
company called TeleTech UK Ltd which was selling insurance by cold-calling
prospective customers. The tribunal found that the call centre was providing an
exempt introductory service based largely on the fact that TeleTech were able to put
the insurer on risk and the customer on cover.
Following this decision, we accepted that call centre services, such as those supplied
by TeleTech, were exempt insurance related services where the call centre was able
to put the insurer on risk at the point of sale without referral back to the insurer.
The Andersen judgment, however, overrides the TeleTech decision. In the light of
that judgment, it is necessary to determine the liability of such call centre services not
on the power to bind alone but by considering whether the services include the
essential characteristics of the services of insurance agents, as outlined above.
1.6 Policy Administration services
Services of the type a broker or agent might normally carry out as part of the routine
administration of a contract of insurance (such as, collecting premiums, handling
queries, processing application forms and effecting changes to policy details and
cover) are insurance-related services and fall within the VAT exemption when they
are performed by an insurance broker or agent as part of a single supply which
includes the previous introduction of the parties to the policies being administered.
However, policy administration services in respect of other policies are outside the
scope of the exemption.
1.6.1 Pension fund management and administration services
Pension fund administration services (such as, the administration of investments,
dealing with queries, maintaining records and the processing of forms) will be exempt
when supplied as part of a single supply which includes the introduction of the
pension policyholder to the insurer – as outlined in paragraph 1.6 above.
In 2003 Customs conducted a consultation on the VAT treatment of pension fund
management services (which are currently exempt under Item 1 as insurance when
provided by a permitted insurer). The result of the consultation was inconclusive and
it was decided that no changes would be made to the VAT treatment for the time
being but that the matter would be kept under review.
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1.7 Claims handling services
Claims handling services are insurance-related services and can comprise a
combination of the following services arising from an insurance claim by a
· checking that documents are correctly completed;
· ensuring that the claim falls within the terms of the policy;
· processing the claim;
· ensuring that an insurer is advised of its exposure;
· agreeing the validity and/or quantum of any claim; or
· arranging for the settlement to be made.
Exemption from VAT is only applicable for such services when they are performed by
an insurance agent as part of a single supply of services which includes the previous
introduction of the parties to the policies under which the claims being handled fall.
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PARTIAL REGULATORY IMPACT ASSESSMENT
VAT Exemption for Insurance-related services
1. This is a partial Regulatory Impact Assessment (RIA) for changes to the VAT
exemption for insurance following a European Court of Justice (ECJ) decision in case
C-472/03 Arthur Andersen & Co Accountants (Andersen).
PURPOSE AND INTENDED EFFECT
2. The law relating to the exemption for insurance is contained in the VAT Act
1994, Schedule 9, Group 2. The purpose of this measure is to amend UK legislation
to give effect to the Andersen judgment
3. Following the proposed changes, in order for a service to fall within the
insurance exemption it must include two key components:
· finding and introducing customers to the insurer, and
· carrying out an intermediation function that is something insurers
cannot carry out themselves.
4. Current UK law allows exemption for a number of insurance related services in
addition to the key services mentioned above. Services such as the handling of
claims or administering policies gained exemption in their own right when an insurer
sub-contracted or outsourced these services to third-party providers. In part this has
been due to successive decisions by the UK Courts, which extended the scope of the
insurance exemption to cover many of these services.
5. The ECJ said that to qualify for exemption the service provider must be an
insurance broker, who can offer insurance from several insurers to potential
customers, or an insurance agent who is tied to one insurer and who finds potential
customers and introduces them to the insurer.
6. The ECJ overturns many of the earlier decisions made by the UK courts, but
goes further by defining some services as taxable, which were previously regarded
as always falling within the exemption for insurance-related services.
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Rationale for Government Intervention
7. The Andersen judgment effectively defines the meaning of “insurance-related
services by insurance brokers or agents” which are exempt under European law, the
6th VAT Directive. The UK is required to implement the Directive properly in its
national legislation. Changes are therefore required so that businesses cannot
choose between applying the direct effect of European law or the broader exemption
currently allowed in UK law. Failure to do so may also result in infraction proceedings
against the UK by the EU Commission.
8. The proposed changes will also result in additional VAT revenues, which can
be used to support Government objectives.
9. Consultation has taken place between HMRC and the Treasury.
10. HMRC has already had some consultation with the insurance industry (the
ABI), the CBI and with businesses that undertake the outsourced services. This
process will continue until the proposed changes are implemented. In addition,
because of the potential impact on business, a 12- week written consultation exercise
will be carried out. This will run from 08 July until 30 September 2005, and invites
comment from all interested parties. This partial RIA is published alongside that
11. Four Options have been considered concerning the implementation and timing
of any changes.
Option A – Do Nothing
12. This option maintains the status quo and would be most attractive to the
insurance industry. However, this is not consistent with the rationale for the
proposed changes referred to in paragraphs 7 and 8 above. HMRC does not
therefore consider this to be a viable option.
Option B – Two-stage implementation
13. To a limited extent, policy changes notifiable by Business Brief could give
partial effect to the Andersen judgment. These policy changes could be brought into
effect from July 2005, with the further legislative changes to fully implement the
judgment made later in the year, following the consultation exercise.
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14. This option would allow HMRC to immediately address those areas where we
have always considered services to be taxable and which only gained the insurance
exemption as a result of the interpretation of the UK Courts. However, delaying any
policy changes would enable HMRC to fully consider any representations following
the formal consultation exercise and implementing all the changes together would
provide more certainty for business. In addition following informal discussions with
the insurance industry, HMRC is aware that a two-stage implementation would not be
welcome by business and may result in additional cost and uncertainty.
Option C – Announce policy at PBR 2005 and introduce changes with effect
from 1 January 2006
15. This option allows the formal consultation over the summer and for HMRC to
fully consider any responses, before announcing Government intentions. We are
aware from informal contacts, that the industry is already considering necessary
changes to contracts etc. This option also secures the additional revenue identified
in a reasonably short period of time. An announcement of intention followed by
implementation shortly afterwards, provides certainty for the insurers and outsource
businesses. This is the preferred option at this stage.
Option D – Deferred implementation of policy and legislative changes to a later
16. This option may be welcome by the insurance industry and outsource
businesses as it gives more time for them to renegotiate contracts etc, and maintains
the status quo for longer. However, any delay in implementation means delay in
realising additional revenue. Delay also adds to uncertainty for both business and
administrators and increases the risk of infraction proceedings by the EU. Any undue
delay between the announcement of intention and implementation also increases the
risk of complex tax avoidance schemes being used to undermine any changes to the
COSTS AND BENEFITS
Sector and Groups Affected
17. There will be a direct affect on insurers, insurance agents, insurance brokers
and those businesses providing outsourced services in the insurance sector. There
is potentially an indirect affect for policyholders in the form of increased premiums or
reduced investment returns.
18. Exchequer benefits: Additional VAT revenue has been estimated at £175M
which can be used to support Government objectives. However, the overall revenue
position will be affected by any resulting changes to Corporation Tax and Insurance
Premium Tax yields. The figure may also be influenced by behavioural responses to
the proposed changes which businesses are asked to comment on in the
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19. Benefits to business: Simplification of legislation and clarification of what
services are exempt as insurance-related services by insurance agents and brokers.
20. The resource impact on individual businesses will depend on how they react
to the proposed changes. In many cases, we expect that fairly straightforward
changes will be needed in accounting procedures or coding. In other cases there
may be additional costs if they provide or receive a mixture of taxable and exempt
supplies within the same contract.
21. As part of the consultation, businesses are being asked to detail the likely
costs to them of the changes. We would also like to be made aware of those cases
where businesses see a benefit to them and if the proposed changes are likely to
impact differently on different sized businesses.
22. Responses to the consultation document and this partial RIA concerning the
regulatory costs and other impacts will be used to inform the final RIA which will be
published with the legislation in due course.
SMALL FIRMS IMPACT TEST
23. No direct impact on small firms has been identified at this stage. Although
there is a revenue impact on insurance businesses which have outsourced affected
services, and on outsourced service providers, the measure provides equal treatment
for businesses regardless of size. There is a potential indirect effect of increased
24. Based on completion of the competition filter, it is not considered that the
measure will have a detrimental impact on competition:
· There are large firms serving both the insurance and outsourcing
markets and, in outsourcing, some of the larger players together
serve a large proportion of the market.
· There is no indication that, where firms compete with one
another, the measure will introduce any distortions of competition
· It is unlikely that the measure will drive merger activity or cause
businesses to leave the market, although businesses may
behave differently if they seek to mitigate increased VAT costs.
· The measure does not distinguish between existing businesses
and those coming new to the market.
· The market changes to take advantage of technological change
but is not characterised by rapid technology change.
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ENFORCEMENT SANCTIONS AND MONITORING
25. There will be no specific sanctions, and monitoring will be carried out as part
of the normal assurance process and anti-avoidance disclosure provisions.
Any comments on this partial RIA should be forwarded to:
Mr Peter McBride
HM Revenue & Customs
Financial Services (VAT & IPT) Team
100 Parliament Street
LONDON SW1A 2BQ
Fax: 020 7147 0456
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