Taxation - Customs fights insurers' refund claims

Customs & Excise last week signalled it would fight moves by the travel industry to reclaim insurance premium tax, despite an Appeal Court ruling that the two-tier tax was illegal under European Community law, writes Chris Quick.

The court ruled in February in favour of travel chain Lunn Poly, which successfully argued that the two-tier insurance premium tax regime between April 1997 and August 1998 amounted to illegal state aid and threatened to distort competition. Insurance sold by travel agents had been subject to a 17.5% rate, while direct insurers paid only 4%.

Following threats by the Association of British Travel Agents to reclaim the difference between the 4% and the 17.5%, Customs said last week the Appeal Court decision would have no impact on tax already paid at the higher rate.

A spokesman added Customs had not yet decided whether to petition the House of Lords for permission to appeal against the decision.

The case is one of a growing number in which UK tax law has been found to contravene European Union legal principles.

A parliamentary committee last week ignored pleas by Ernst & Young to reverse a Budget decision which will result in VAT being charged on outsourced financial services. The firm said the move flouted European law.