Home Knowledge Change in VAT Treatment of Outsourced Claim Handling Services

Change in VAT Treatment of Outsourced Claim Handling Services

On 17 March 2016 the Court of Justice of the European Union (CJEU) released its decision in the Aspiro SA case (C-40/15) (Aspiro) regarding the scope of the VAT exemption for certain services that are commonly outsourced by insurance companies to third party service providers.

The CJEU judgment held that entrusting the handling of claims to a third party is not exempt from VAT in circumstances where that outsourcing is not linked to the finding of prospective clients and their introduction to the insurer with a view to the conclusion of insurance contracts. The outcome of this case is relevant for insurers and claims handling companies. It is particularly important for insurers that outsource claims handling and other back office functions as they could now potentially face a large, unrecoverable VAT bill.

The central issue in this case was whether claim handling services performed in the name and for the account of an insurer by a service provider that is not itself an insurance agent qualified as VAT exempt insurance services.

What services did Aspiro provide?

Aspiro provided claims handling services to an insurance company consisting of the full settlement of claims arising from insured events. In providing its services, Aspiro dealt directly with the customer, but did this on behalf of the insurer. Aspiro did not have a legal relationship with the insured person. Aspiro provided a variety of services including the preparation and processing of damage reports, damage investigation and contacting the insured where necessary. After examining the collected documents, Aspiro decided on the settlement of the claim. Aspiro also provided other administrative and technical work in connection with these activities.

Ruling by CJEU

The CJEU was asked whether such services fell within Article 135(1)(a) of the VAT Directive as insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents. In the judgment, the CJEU ruled that claim handling services provided by a third party in the name and on behalf of an insurer were not exempt from VAT.

The CJEU ultimately made this conclusion after determining the wording of Article 135(1)(a) of the VAT Directive must be interpreted strictly. The insurance exemption under Article 135(1)(a) of the VAT Directive extends to “related services performed by insurance brokers and insurance agents“. On this point, it was clear that the services performed by Aspiro were related to insurance. The term “related” was sufficiently broad to cover different services connected with the performance of insurance transactions and, in particular, the settlement of claims.

However, to be an insurance broker or agent, it is necessary that a person should

  1. have a relationship with the insurer and insured; and
  2. perform activities which cover the essential aspects of the work of an insurance broker/agent, such as finding prospective clients and introducing them to the insurer.

Aspiro was able to satisfy the first of these conditions as it had a direct relationship with the insurer and an indirect relationship with the insured. However, Aspiro could not meet the second condition as it was not an insurance broker or agent. As such, the services performed by Aspiro could not benefit from the insurance exemption.

Impact on Irish insurers and third party service providers

This is an important decision for insurance companies and their service providers to be aware of as it is a change to the current position in Ireland. Ireland currently considers claims handling services to be exempt from VAT where the outsourcer has the authority to settle claims on behalf of the insurer. Irish insurance companies now face the possibility of up to 23 per cent higher costs for work they outsource on managing and settling claims, and on other back-office functions. The eventual cost to insurers will depend on the cost of that part of their business that is outsourced to third party service providers.

Next steps for insurers and third party service providers

The Irish Revenue have confirmed in a statement since the judgment that they are “currently considering the judgment and its possible implications for Irish VAT law. While changes to Irish VAT law have not yet been introduced (which is not surprising given the short period of time since the judgment), it will be important for insurers and their service providers to consider the impact of the judgment on their existing arrangements. 

Such considerations should include:

  • Reviewing contractual terms to determine who carries any VAT costs (i.e. are fees VAT inclusive or exclusive)
  • Examining whether a renegotiation event is triggered in any agreements
  • Determining whether other potential exemptions could potentially apply

Although the Irish Revenue is bound by the judgment of the CJEU, the impact of the decision will remain unclear until the Irish Revenue confirms how they will interpret and apply the judgment.

Contributed by Padhraic Mulpeter