ABI Calls on Government to Delay VAT Enforcement Ruling; Cost Estimated at $352 Million

September 30, 2005

The Association of British Insurers (ABI) has called on the Government to delay implementation of an EU court ruling that would impose value added taxes (VAT) on services outsourced beyond EU borders. The ABI estimates that the cost to insurers and ultimately to the public would be over 200 million pounds ($352 million).

The ABI is seeking a way to “mitigate the impact” of the ruling made by the European Court of Justice last March that outsourced insurance services will no longer be exempt from VAT. A number of U.K. insurers, including Aviva and Prudential, have outsourced their back office processing, claims handling and call centers, mainly to India.

In its submission to the Government’s consultation, the ABI noted:
— The costs to the industry of implementing this change will be considerable and it should only be implemented at a time when these can be kept to a minimum;
— Many smaller insurance companies and closed funds, which tend to outsource many of their functions, are likely to be particularly badly hit;
— The insurance industry needs clarification on how the new regime will work;
— Customers of the UK insurance industry already pay around £2.6 billion pounds [$4.57 billion] in Insurance Premium Tax and the insurance industry suffers from 1 billion pound [$1.76 billion] in irrecoverable VAT.

Peter Vipond, the ABI’s Director of Financial Regulation and Taxation, commented: “The new VAT rules will increase the tax burden on customers of insurers by at least £200 million a year. We oppose any attempt to ‘gold plate’ by rushing implementation. 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 areas of business affected, so that insurance companies and outsourcers can put in place the necessary changes to their systems. We are calling for a postponement of this new tax increase, currently planned in the UK for 1 January 2006. These changes must not be rushed through until the full implications for the UK economy have been considered.”

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