Insurers battle tax change

The Association of British Insurers (ABI) has called for the postponement of
new European tax legislation that will increase tax costs by at least £200m a
year, and reduce the benefits of outsourcing.

The new legislation, which is due to come into force 1 January 2006, demands
that insurers should pay VAT on many previously tax-exempt outsourced services,
such as claims handling.

The extra charges threaten to halt the recent trend of offshoring insurance
roles, and could bring many back-office functions closer to home.

Customers of the insurance industry already pay around £2.6b in Insurance
Premium Tax, and there are fears that the extra charge will have an unnecessary
impact on policyholders and services providers.

Paul Vipond, director of financial regulation and taxation at ABI, said: ‘The
UK has a highly efficient insurance industry, and many specialist and
administrative functions are outsourced.

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

Smaller insurance companies and closed funds, which tend to rely on
outsourcing more heavily, are expected to be particularly affected by this

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