ABI predicts delay to new VAT rules

The government could use its pre-Budget report to delay the controversial new VAT rules for outsourced insurance services, the Association of British Insurers has said.

Peter Vipond, director of financial regulation and taxation at the ABI, told Accountancy Age that ‘with representations being made, the government could announce a delay in the implementation of the rules in the PBR for a further nine months or possibly until 1 Jan 2007’.

He said the insurance industry was doing ‘everything within its power’ to urge the Treasury, HM Revenue & Customs and other parties to ‘mitigate the impact’ of the new rules by delaying their implementation and ‘using their discretion not to penalise the customers of insurers’.

On 3 March this year, the European Court of Justice made a landmark ruling on the tax status of outsourced insurance-related services.

It ruled that Andersen Consulting, now Accenture, should charge VAT on outsourced back-office services supplied to the insurer Universal Life.

The services provided by Accenture included a range of insurance-related services such as the acceptance and checking of applications for insurance, claims management and drafting reports to policyholders and third parties. The new rules were due to be imposed on 1 January 2006.

Vipond said that if these rules were introduced, it would add an additional tax burden of £200m on top of what insurance companies already pay.

‘The industry already pays over £1bn in VAT and around £2.6bn in insurance premium tax with an extra £1bn in irrecoverable VAT.

‘We need clarity prior to implementation on the exact areas of business affected, so that insurance companies and outsourcers can put in place the necessary changes to their systems.’

Andrew Paddick, director general of the Institute of Insurance Brokers, agreed and said the government should take a ‘robust stand’ and ‘do everything possible in its power’ to secure an amendment to the EU’s sixth directive, that ‘more accurately and realistically’ reflected how global insurance markets operate.

A HMRC spokesman said that the 1 January 2006 deadline was ‘not set in stone’ and merely a ‘suggested’ implementation date.