Following a meeting of the Council of the European Union on 17 November 2010, plans to reform the VAT exemption for insurance and the wider financial services industry are set to continue, with Member States agreeing to find a resolution to the current problems.
One of the main issues under scrutiny is the outsourcing of claims handling and other back office processes by insurance companies. The use of outsourcing by insurance companies has increased in recent years, in the UK and other Member States, with the aim of reducing costs. These services do not fall under the exemption set out in Council Directive 77/388/EEC of May 1977 that allows insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents, to be exempt from VAT. However, common practice in the UK insurance industry has been to stretch the original scope of the exemption to include these outsourced services.
As a result, the Council of the European Union has looked at changing VAT laws to reflect this development in the insurance industry. The UK has called for the VAT exemption to be extended to cover outsourced services, but this has been resisted by other Member States that are concerned that the further development of outsourcing would see jobs moving to non-European Union countries, where costs are lower.
Commentators expect that the issue will be picked up early in the new year and that a text will be agreed in the first half of 2012.