Poland VAT case to test EU multimillion insurance outsourcing

Poland has referred a tax case to the European Court of Justice that should clarify a long-standing question over the EU VAT liability of outsourced insurance services.

In 2005, the ECJ ruled in the Andersen case that outsourced insurance services, including claims handling, should come with an unrecoverable VAT charge. The UK, with its multi-million insurance outsourcing industry, has so far ignored this position, preferring to wait for a clarifying ruling. Since then Germany in particularly has been pushing for the VAT charge on outsourcing be to implemented as it has only a small outsourcing industry.

In September 2015, the Skandia case on financial services VAT had indicated that the UK would have to impose unrecoverable VAT. But it quickly emerged that the UK’s particular group rules would leave the exemption intact.

Poland has now referred a case, BRE Ubezpieczenia, to the ECJ asking it to clarify the position once and for all. It has asked if outsourced claims hand landing may benefit from the exemption. The defence is that such services fall within the definition of the Polish Insurance Activity Act, so are outside of the scope of VAT.

Insurance and other financial services are VAT exempt under the EU VAT Directive. This presents a problem when insurers outsource back office services to outside parties, particularly claims handling services. The outsourcer would potentially have to charge VAT back to the insurer. The insurer would not be able to recover this VAT since their VAT exemption prevents this and would suffer 20% plus VAT costs. By contrast, if the insurer had kept the exemption, the service would be VAT free.