The European Court of Justice (ECJ) has held in a recent case that claim settlement services provided on behalf of an insurance company by a Polish service provider were not exempt from VAT (Minister Finansów v Aspiro SA (Case C-40/15)).

The EU VAT Directive provides that insurance transactions, including related services by insurance brokers and insurance agents, are exempt from VAT.

The key question in the case was whether the service provider performed services related to insurance transactions as an insurance broker or agent. While the service provider had a direct contractual relationship with the insurer, it acted as a broker or agent only if its services included finding prospective customers and introducing them to the insurer with a view to concluding insurance contracts. The ECJ held that the service provider's activities did not meet this test despite claims settlement being an essential part of insurance transaction, and the services were, instead, a division of the insurer's activities.

The issue for UK insurers is that currently UK VAT law provides that claims handling is an exempt service. HMRC had previously stated that it believed the UK's VAT exemption was too wide, and would need to be amended, but this proposal was shelved some time ago after lobbying by the industry.

In light of the Aspiro decision however it is likely that HMRC will want to review the position again and may well lobby the Government to amend the legislation so as to make claims handling a vatable service. This follows a number of recent HMRC successes in the courts regarding the extent of the VAT exemption for insurance-related services, such as the First Tier Tribunal case of Risktop Consulting which held that a company that analysed risk for insurers and liaised with the insured to help the insured reduce identified risks was not an "insurance agent".

Any such change would have a significant impact on insurers and might lead to increased premiums. Any developments in this area will need to be closely monitored.