Insurance claims handling services – to VAT or not to VAT?
On 17 March 2016, the Court of Justice of the European Union (the “CJEU”) confirmed, in its ruling in case number C-40/15, that the provision of third party insurance claims handling services made in the name and on behalf of an insurance company without undertaking brokerage activities to facilitate the conclusion of insurance contracts between the insured and the insurer, are not exempt transactions for Value Added Tax (VAT) purposes.
The judgment, handed by the CJEU, was given following a request by the Polish Supreme Administrative Court for a preliminary ruling concerning the interpretation of Article 135(1)(a) of the VAT Directive. The case was launched after Aspiro, a Polish company providing claims handling services for and on behalf of an insurance company, requested a VAT ruling supporting its claims that the provision of its services was exempt from VAT pursuant to Article 135(1)(a) of the VAT Directive. The said article exempts transactions concluded by insurers consisting in the provision of “insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents”.
In its deliberations, the court considered whether the activities of claims settlement, such as those undertaken by Aspiro, qualified for the above-cited exemption, under either one of the two criteria specified therein, that is, whether the services performed were to be regarded as either (i) insurance transactions, or (ii) related therewith and provided by insurance brokers and agencies.
The CJEU rejected claims that Aspiro could be regarded as providing “insurance and reinsurance transactions” owing to the fact that established case law defined such services as referring to transactions whereby in return for prior payment of a premium, the insurer undertakes to provide the insured, with the agreed service in the event of materialisation of the risk covered.
Furthermore, the court made reference to the fact that these transactions necessarily entailed the existence of a contractual rapport between the provider of the insurance cover and the insured, which clearly did not exist in this case.
In determining whether claims handling services qualified under the exemption in terms of “related services” of insurance transactions performed by insurance brokers and agencies, (which in itself necessitates the requirement to fulfil two criteria, that is, (i) the service must qualify as “related services”, and (ii) it must be performed by an insurance broker or agent), reference was made to the opinion issued by the CJEU’s Advocate General, who affirmed that the term “related services” is sufficiently broad to cover different services connected with the performance of insurance transactions, such as those provided by Aspiro.
However, the CJEU could not regard the business activities carried out by Aspiro as being services performed by insurance brokers and agencies. The CJEU based its decision upon the fact that although there existed a direct business relationship between Aspiro, the insurer and the insured, the business activities it undertook lacked the essential intermediary characteristics contained in the work of a broker or an agent.
On this basis, the CJEU concluded that “the act of merely entrusting the handling of claims to a third party, without that outsourcing being linked to the finding of prospective clients and their introduction to the insurer with a view to the conclusion of insurance contracts” is not exempt from VAT.
One interesting point made by the court was that, given that the activities performed by Aspiro were not activities generally provided by an insurance broker/agent, it was irrelevant to consider the definition of “insurance mediation” as defined in the Insurance Mediation Directive.
How will this judgment affect the industry?
This judgment has been highly anticipated and has indeed attracted a lot of interest from the insurance industry in view of the lack of (and sometimes varying) interpretations concerning the meaning of “related services” performed by insurance brokers and insurance agents.
This judgment is expected to impact, among others, those businesses which provide solely claims handling services (that is, not bundled with other exempt transactions) and is also relevant to local entities which are required to account for reverse charged VAT in respect of claims handling services received from foreign suppliers.
This decision represents a good opportunity for businesses to revisit their current arrangements concerning claims handling services and consider whether their VAT position needs to be regularised.