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VAT and insurance Back  
An opinion issued by the European Court of Justice Advocate General has placed a question mark over the VAT status of the outsourcing of services by insurance companies. The full implications will not be clear until the Court itself rules on the matter.
The Advocate General
The EU legal system differs from that with which people in Ireland are accustomed. In Ireland the parties to a dispute state their case before a judge, and in due course the court issues a judgment. Subject to appeals etc that is the end of the matter. The European Court of Justice operates by having the parties to a dispute submit their case to a court official called the Advocate General. The Advocate General examines the merits of the prospective cases and prepares a suggested draft judgment which he submits to the court. The court then hears the parties to the dispute, and issues a final judgment. This final judgment is usually in line with the draft judgment prepared by the Advocate General, but in some cases can be quite different, and even to the opposite effect, to that prepared by the Advocate General. An Advocate General’s opinion therefore has more of the capacity to create alarm than it has to clarify matters with any finality.

Skandia are a Swedish insurance company. They took over many of the functions of a subsidiary company which carried on a life assurance business. The functions taken over included the sale of the insurance products, the handling of claims, the making of actuarial estimates, and the management of the investments of the life company. Broadly speaking, they took over the entire administrative function, leaving the life assurance company only with the task of bearing the risks.

This might be seen as outsourcing taken to its ultimate extreme.

The legislation
VAT legislation provides an exemption from VAT for insurance services, and also for agency services relating to the collection of insurance premiums, and relating to insurance services. These exemptions in Irish domestic legislation are our interpretation of the exemption contained in the 6th Directive for ‘insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents.’

The Advocate General noted that Skandia would neither be carrying insurance risks, nor would it be providing services to the insured persons. Rather it would be providing services to the insurance company itself. The Advocate General concluded that this excluded Skandia from the possibility that it was engaged in insurance transactions. They also concluded that Skandia did not qualify as a broker or agent and accordingly was not exempt on the basis of providing services related to insurance transactions.

Prima facie, this judgment has implications for outsourcing by insurance companies. At present it seems unlikely that the ECJ will endorse the opinion in a way which would impact on brokers.

Dermot O’Brien is a Director in Indirect Taxes in KPMG.

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