Customs and Excise set to adopt a strict interpretation of the EU outsourcing ruling

The insurance industry will be unable to prevent the implementation of an EU ruling on outsourcing that will cost the industry millions of pounds in additional VAT payments, according to the ABI. But brokers look set to escape the burden.

The ABI admitted that the negotiations between the insurance industry and Customs and Excise over the UK"s adoption of the VAT ruling leave "little room for optimism."

Leigh Francis, the ABI taxation expert who is leading the consultations, told Insurance Times: "We are effectively battling at the margins."

Customs is expected to adopt a strict interpretation of the European Court
of Justice ruling, meaning all outsourced back office functions will be subject to a 17.5% VAT charge from January 2006.

Francis predicted the ruling will cost the industry at least £200m a year.
But larger brokers and wholesale brokers, who keep their back office functions in-house, should escape largely unscathed providing they can demonstrate that their primary role is as an "intermediary," he said.

Claims handlers, loss adjusters, brokers and insurers who farm out much of their back-office work will
all be hit.

Professor Melchior Wathelet, a former European Court of Justice judge said that any attempt to take the case back to the European Court would almost certainly end in failure due to the tacit support of the UK government.

Consultations on the implementation of the EU ruling have been put on hold until after the general election.