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ABSTRACT
According to Article 135(1)(a) of the European VAT Directive, ‘insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents’ are exempt from VAT. In practice, this provision is far from being clear, and taxpayers in the insurance sector regularly face issues as to the proper scope of the exemption. The definition handed down by the Court largely focuses on the very nature of ‘insurance’, ‘broker’, and ‘agent,’ and leaves, regrettably, no leeway for outsourced services to benefit from the VAT exemption. This is of particular evidence for claims handling services, which are regarded by the Court as ‘back-office services’ subject to VAT when performed by third parties to the insurance contract. This article considers the CJEU's jurisprudence as regards insurance claims handling services, and the ‘literal and narrow’ approach taken by the Court as compared to a ‘market approach’ in line with economic reality. It provides a view on the implementation of the Court's ruling in Belgium and in the UK, in which different VAT treatments apply in relation to claims handling services since 1 January 2018.
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Notes
1 HMRC VAT Notice 701/36/13, paras 8.4, 8.5, 10.3 and 10.4.
2 Johan Van der Paal, Kenneth Vyncke and Elisabeth de Donnea, ‘EU VAT Aspects of Services Supplied in the Framework of Settling Insurance Claims’ [2012] 23 International VAT Monitor 6, 411.
3 Benoît Pernet and Philippe Gamito, ‘Prestations de services de règlement de sinistres : la Cour de Justice clarifie les règles en matière de TVA’ [2016] 32 L’Assurance au Présent 4, 2.
4 Marta Papis-Almansa, ‘VAT and Insurance: the European Union’ in Robert F. Van Brederode and Richard Krever, VAT and Financial Services – Comparative Law and Economic Perspectives (Springer Nature 2017), 342.
5 Case C-349/96 Card Protection Plan Ltd (CPP) [1999] EU:C:1999:93.
6 Case C-240/99 Skandia [2001] EU:C:2001:140.
7 Case C-8/01 Taksatorringen [2003] EU:C:2003:621.
8 Case C-472/03 Arthur Andersen [2005] EU:C:2005:135.
9 Case C-13/06 Commission v Greece [2006] EU:C:2006:765.
10 Case C-124/07 JCM Beheer [2008] EU:C:2008:196.
11 Case C-242/08 Swiss Re Germany Holdings GmbH [2009] EU:C:2009:647.
12 Case C-224/11 BGŻ Leasing [2013] EU:C:2013:15.
13 Case C-584/13 Mapfre Warranty [2015] EU:C:2015:488.
14 Case C-40/15 Minister Finansów v Aspiro SA [2016] EU:C:2016:172.
15 Papis-Almansa, Insurance in European VAT: Current and Preferred Treatment in the Light of the New Zealand and Australian GST Systems (51 EUCOTAX Series on European Taxation 2016), 137.
16 Council Directive 77/92/EEC of 13 December 1976 on measures to facilitate the effective exercise of freedom of establishment and freedom to provide services in respect of the activities of insurance agents and brokers, repealed by Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on insurance mediation with effect from 15 January 2005 (which is to be repealed in 2018 by Directive 2016/97/EC of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast)).
17 Arthur Andersen (n 8), para 34.
18 Arthur Andersen (n 8), para 38.
19 In Belgium, administrative decision no. E.T.103.851/3 dated 20 January 2007 foresees an option to tax. In the UK, businesses have been entitled to ignore the UK exemption and apply the direct effect of EU law since Arthur Andersen in 2005 (Business Brief 11/05 and Business Brief 23/05); Rita de la Feria, ‘The EU VAT Treatment of Insurance and Financial Services (Again) Under Review’ [2007] EC Tax Review 2, 86.
20 COM(2007) 747 final dated 28 November 2007 and COM(2007) 746 dated 5 October 2007.
21 Article 14, para 1, c of the proposal.
22 COM(2015) 610 final dated 27 October 2015; Papis-Almansa (n 4), 359.
23 Aspiro (n 14), para 25.
24 A similar reasoning was held by the Court in Skandia and Taksatorringen in which the Court took the view that the criteria developed in SDC (Case C-2/95 SDC v Skatteministeriet [1997] EU:C:1997:278) were not applicable to insurance transactions on the basis of the following textual analysis: pursuant to e.g. Article 135(1)(d) or (f) of the VAT directive, the financial exemptions apply to transactions ‘concerning’ or ‘relating to’ various financial operations, whereas the exemption of Article 135(1)(a) only applies to ‘insurance transactions’, preventing the latter from being broken down.
25 Peter Mason, David Jordorson and Hamish Garnett, ‘Aspiro: A Judgment Set in Stone?’ [2016] 1308 Tax Journal, 15.
26 Common system for value added tax: uniform basis of assessment. Proposal for a sixth Council Directive on the harmonization of Member States concerning turnover taxes COM(73) 950, 15 (quoted by Papis-Almansa (n 4), 341, (n 28)).
27 Papis-Almansa (n 4), 341.
28 Mason, Jordorson and Garnett (n 25), 17.
29 Mason, Jordorson and Garnett (n 25), 18. As pointed out in Aspiro, that analysis was supported by the proposal for a Council directive amending Directive 2006/112/EC as regards the treatment of insurance and financial services (COM(2007) 747 final) presented by the Commission on 28 November 2007 which we already referred to in point 2.1.
30 A key reference is made to the Directive 2009/65/EC on Undertakings for Collective Investment in Transferable Securities (UCITS) to define the scope of the exemption.
31 Case C-264/14 David Hedqvist [2015] EU:C:2015:718.
32 Article 135(1)(e): ‘transactions, including negotiation, concerning currency, bank notes and coins used as legal tender, with the exception of collectors’ items, that is to say, gold, silver or other metal coins or bank notes which are not normally used as legal tender or coins of numismatic interest’.
33 David Hedqvist (n 30), para 47 (our emphasis).
34 Pernet and Gamito, ‘2015: Rétrospective sur un grand cru en matière de TVA pour les secteurs financiers et de l’assurance’ [2016] 1 Revue Générale de la Fiscalité et de Comptabilité Pratique, 12.
35 Recital 7 of the VAT directive ‘The common system of VAT should … result in neutrality in competition, such that … similar goods and services bear the same tax burden, whatever the length if the production and distribution chain’.
36 See inter alia Case C-144/00 Hoffmann [2003] EU:C:2003:192, para 27.
37 Aspiro (n 14), para 31 (our emphasis).
38 de la Feria, ‘EU VAT Principles as Interpretative Aids to EU VAT Rules: The Inherent Paradox’ [2016] WP 16 Oxford University Centre for Business Taxation 3, 12; For an overview of these principles: Joachim Englisch, ‘VAT and General Principles of EU Law’ in Denis Weber, Traditional and Alternative Routes to European Tax Integration (Amsterdam, IBFD, 2010), Chapter 11, paras 11.3.1. and 11.3.2.
39 JCM Beheer (n 10), para 28.
40 Mason, Jordorson and Garnett (n 25), 15; de la Feria also points out the casuistic approach of the CJEU in interpreting VAT exemptions given that there is no exemption rule that has been interpreted exclusively on the basis of strict interpretation or exclusively on the basis of fiscal neutrality, de la Feria (n 37), 19.
41 Hans-Martin Grambeck, ‘Outsourcing in the EU Financial Sector – Where Are We Heading?’ [2009] 20 International VAT Monitor 6, 462. On the other hand, exemption without the right to deduct is a form of partial taxation (input taxation) that compensates for the difficulty (if it exists) of subjecting insurance to full taxation. Taxing more of their inputs as a result of outsourcing is a good thing in B2C transactions, since it comes closer to full taxation, though in B2B insurance it exacerbates the problems of cascading inherent in exemption.
42 According to the SDC doctrine, outsourced services seen as specific and essential to the provision of exempt financial services may benefit from the VAT exemption to which they relate, see (n 28).
43 Pernet and Gamito, ‘Arrêt Bookit – Opérations de paiement et de virement: “indispensable” ne signifie pas toujours “spécifique et essentiel” – Une approche restrictive de la Cour de Justice’ [2016] 3 Revue Luxembourgeoise de Bancassurfinance 3, 162.
44 Case C-607/14 Bookit Ltd [2016] EU:C:2016:355.
45 Case C-350/10 Nordea Pankki Suomi [2011] EU:C:2011:532.
46 Article 135(1)(d): ‘transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection’.
47 Article 135(1)(g): ‘the management of special investment funds as defined by Member States’; see Kirsch and Gamito, ‘Contours de l’exonération TVA relative à la gestion des fonds communs de placement a la lumière de la jurisprudence récente de la Cour de Justice’ [2013] Actualités fiscales 34, 7–8; Kirsch and Gamito, La TVA et les services financiers (Anthémis 2017), 451.
48 Case C-275/11 GfBk [2013] EU:C:2013:141.
49 Pernet and Gamito (n 42), 162.
50 Pernet and Gamito (n 42), 161. We further note the absence of distortion of competition in relation to output transactions for which Article 169(c), of the VAT directive foresees a right of input tax recovery when services in Article 135(1)(a)–(f) are performed to clients established outside the EU.
51 Papis-Almansa, Insurance in European VAT: Current and Preferred Treatment in the Light of the New Zealand and Australian GST Systems (51 EUCOTAX Series on European Taxation 2016), 114 and f.; Papis-Almansa, ‘Insurance – Present Problems and Future Treatment’ (Seminar on the present and future VAT treatment of the financial sector, Copenhagen, 26 September 2017), slides 12–15.
52 In 1996, the EU Commission published the ‘TCA-ADD Report’ which aimed at analysing the impact of the ‘cash-flow system’ that would fully tax both margin and explicit fees and commissions perceived by financial and insurance institutions. Since all financial services would be taxable under the TCA system, financial institutions would be allowed to claim full refund of VAT paid on all taxable purchases. Ultimately, this was judged to be too difficult and too complex to apply in standard commercial practices by most of the financial and insurance institutions; Michel Aujean, ‘Harmonization of VAT in the EU: Back to the Future’ [2012] 3 EC Tax Review, 139.
53 Ian Crawford, Michael Keen and Stephen Smith, ‘Value Added Tax and Excises’ in Dimensions of Tax Design – The Mirrlees Review (Oxford University Press, 2010), 305.
54 See (n 22).
55 Council of the European Union, ‘Tax Policy Roadmap of the Bulgarian Presidency of the Council’ (30 January 2018, 5668/18, FISC 37), 13 (point B).
56 Ibidem.
57 Case C-7/13 Skandia America Corporation [2014] EU:C:2014:2225. For a summary explanation of this case and its impact in Belgium, see point 3.1.2; see also Gert-Jan van Noorden, ‘State of Play Regarding the Skandia America corporation Case’ [2016] 4 EC Tax Review, 211–220.
58 Case C-326/15 DNB Banka [2017] EU:C:2017:719, para 37.
59 Karen Killington and Carine Epardaud, ‘Is the VAT Cost Sharing Exemption Dead? How the CJEU Decisions have Limited the Scope of the Exemption?’ [2017] 1372 Tax Journal, 14–16; Gamito, ‘Is the Cost-Sharing Group for VAT Destined to Become a Historical Artifact for Financial Institutions?’ [2017] 87 Tax Notes International 7, 691–702.
60 Richard Louden and Kevin Carletti, ‘Aspiro and Claims Handling Supplies’ [2016] 1303 Tax Journal, 6; this concern was raised in 2005 after Arthur Andersen by the Association of British Insurers (press release 101/05 of 29 September 2005).
61 Kathryn James, The Rise of the Value-Added Tax (Cambridge University Press, 2015), 65.
62 Ibidem.
63 See point 2.2.1.
64 Ibidem.
65 Mason, Jordorson and Garnett (n 25), 15.
66 For an extensive analysis of the compatibility of the VAT directive with the Internal Market: de la Feria, ‘VAT and the EC Internal Market: the Shortcomings of Harmonisation’ [2009] WP Oxford Centre for Business Taxation 29.
67 Expression used to describe the UK leaving the EU in March 2019.
68 In that respect, whether the UK will maintain the status quo after Brexit by not implementing Aspiro is uncertain. However, it is expected that Aspiro will be of interpretative authority and that UK courts will likely follow the interpretation given by the CJEU when construing UK law, unless there is a change in UK law in a post-Brexit world; see point 3.2.2 and George Peretz, ‘An End to the Direct Jurisdiction of the CJEU: Red Line or Pink Blur?’ [2017] 1368 Tax Journal 12.
69 This may change once Brexit has taken place if the UK regards claims handling services from the UK to EU recipients as zero-rated supplies.
70 Grambeck, ‘Online Insurance Mediation under EU VAT’ [2012] 23 International VAT Monitor 2, 107.
71 This article only focuses on Belgium and the UK. In France, the exemption may apply when claims handling services are performed by regulated insurance brokers, although this is usually challenged when these services are not performed together with distribution. In Ireland, claims handling services may be exempt under specific circumstances and the claims handler will need delegated written authority. In Poland and Finland, claims handling services are usually exempt when provided by third parties. In the Netherlands and Greece, the VAT treatment of claims handling services is complex, and relies on domestic rulings and communications by competent tax authorities.
72 Belgian Circular Letter no. 10 of 19 March 1979.
73 Arthur Andersen (n 8).
74 Belgian Administrative Decision no. E.T. 103.851 of 25 April 2005.
75 See (n 22).
76 Administrative Decision no E.T. 103.851/2 and 103.851/3 of 14 November 2006 and 20 January 2007 respectively.
77 The long-term surveyors assessing damages on high sea vessels were in theory a notable exception. In the absence of the insurance VAT exemption (Article 135(1)(a) of the VAT directive) that prevailed before the Andersen case, their services could indeed benefit from another exemption applying to e.g. services relating to high sea vessels and their cargoes (Article 148(1)(d) of the VAT directive). The latter did not make any difference to the insurance companies (customers), but were by far more beneficial to the surveyors since it entitled them to deduct VAT borne on their costs (input VAT) whereas the former did not.
78 In a decision no. E.T. 127.577 of 3 April 2015, Belgium extensively applied Skandia: regardless of their being part of the same legal entity, no branch or head-office abroad would be considered part of the same taxable person if supplier or recipient entity was part of a VAT group; see Pernet and Gamito (n 33), 20–21.
79 Circular letter 2017/C/36 of 12 June 2017.
80 Ibidem, section III.
81 Ibidem, section II.
82 The query has been put to the Belgian Central VAT Authorities, and preliminary analysis and discussions have already taken place but no decision has been made when these lines were being printed.
83 Although a reinsurance transaction is not defined in the VAT directive, a definition can be found in Article 1 of the Council Regulation (EU) no. 878/2011 of 2 September 2011 amending Regulation (EU) no. 442/2011 concerning restrictive measures in view of the situation in Syria [2012] OJ L 228/1: ‘reinsurance means the activity consisting in accepting risks ceded by an insurance undertaking or by another reinsurance undertaking or, in the case of the association of underwriters known as Lloyd's, the activity consisting in accepting risks, ceded by any member of Lloyd's, by an insurance or reinsurance undertaking other than the association of underwriters known as Lloyd's’.
84 In the UK, HMRC does not make any particular distinction between insurance and reinsurance in relation to claims handling services. Besides, because of the wider approach taken by the UK in respect of the VAT regime for claims handling services (see point 3.2), this debate is unlikely to arise.
85 Substituted by the VAT (insurance) Order, SI 2004/3083 with effect from 1 January 2005.
86 VATA 1994 Schedule 9, Group 2, Note 1 (our emphasis).
87 HMRC VAT Notice 701/36/13, para 8.4. It should be noted that, since 1 April 2013, HMRC does not longer accept to expand the exemption to pension mis-selling review services and telephone helpline, following enquiries from the European Commission.
88 See point 1; care should be taken to identify services that actually fall within the definition of ‘claims handling’ to avoid situations in which services, that fall outside this definition, are being incorrectly exempted from VAT, eg legal services supplied to the insured. HMRC has recently been targeting a wide range of businesses offering insurance claims handling services and this is expected to continue (in this regard: Andy Gott, ‘VAT and insurance claims handling services’ [2017] 1358 Tax Journal, 20).
89 HMRC VAT Notice 701/36/13, para 8.5.
90 VATA 1994 Schedule 9, Group 2, Note 9 (our emphasis).
91 HMRC VAT Notice 701/36/13, para 8.5.
92 Ibidem, para 9.3.1.
93 This was recently highlighted in Riskstop Consulting Limited in which the First-Tier Tribunal confirmed that ‘the provisions of Item 4 seem to range wider than the scope of delineated by the CJEU in its caselaw on art 135 (and its predecessor 13B). We do consider it unsatisfactory that, a decade after the Andersen decision, the UK domestic legislation still appears to be so far adrift from the CJEU's interpretation of art 135’, see Riskstop Consulting Limited v HMRC [2015] UKFTT 469 (1 October 2015), para 78; in a similar vein, see Westinsure Group Ltd v HMRC [2014] UKUT 452 TCC.
94 Business Brief 11/05 dated 18 May 2005 (BB/11B/05, Division V16.3).
95 Business Brief 23/05 dated 5 December 2005 (BB/23A/05, Division 16.3).
96 See (n 22).
97 These concepts of direct effect and primacy of EU law, recognised in the earliest case law of the CJEU, are what made the European Community a real Community of law; see Richard Lyal, ‘Compatibility of National Tax Measures with EU Law: The Role of the European Commission in Tax Litigation before the European Court of Justice’ [2015] EC Tax Review 1, 7.
98 Richard Iferenta and Raymond Hill, ‘The Post-Brexit Interpretation of UK VAT Law’ [2016] 1327 Tax Journal, 18.
99 Zoe Feller, ‘The Impact of Brexit on Taxation in the Financial Services Sector’ [2017] 19 Derivatives & Financial Instruments 4, 3.
100 Iferenta and Hill (n 100), 18.
101 Mason, Jordorson and Garnett (n 25).
102 See in particular (n 24).