Insurers are facing a massive hike in their tax bills following a landmark ruling from the European Court of Justice today, according to Ernst & Young.

Under the ruling, insurers will no longer be exempt from paying VAT on services provided by an outsourcing company, for example the checking of insurance applications or claims management.

Brokers and agents, still classed as intermediaries between the insurer and the insured party, will remain exempt.

And it is likely that some, if not all, of the increased tax costs will have to be passed on in the form of increased insurance premiums.

Peter Jenkins, global head of indirect tax at Ernst & Young, said: "This ruling will have a massive impact for many businesses operating in the insurance industry, particularly outsourced service providers providing administrative and other back office services to the insurers.

"It will hit margins and force up premiums, or turn profitable contracts into loss makers."

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