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HMRC internal manual

VAT Insurance

Services of an insurance intermediary: insurance brokers and insurance agents: decision of the ECJ in Arthur Andersen & Co Accountants C472/03 (Andersen)

This Dutch case concerned the VAT liability of certain ‘back office’ services supplied by Arthur Andersen to an insurance company. These services included the issuing, management and cancellation of policies, the management of claims and, in most cases, taking decisions that bound the insurer to enter into insurance contracts.

The ECJ was asked whether these services qualified for exemption under Article 13 B (a) (now Article 135 1 (a) of the Principal VAT Directive), as ‘related services performed by insurance brokers and insurance agents’. To fall within the exemption Andersen had to qualify as either a broker or an agent.

The ECJ held that the essential characteristic of insurance brokers was that they had complete freedom of choice of insurer for their client. Andersen did not work on behalf of an insured party, but rather for a single insurance company, therefore it could not qualify as a broker.

The Court further held that an insurance agent, while usually tied to a particular insurer, must be instrumental in bringing together the two parties to the insurance contract by finding prospective clients and introducing them to the insurer. Andersen did not perform any type of introductory service and therefore could not qualify as an agent. The fact that they were able to bind the insurer was not a determining factor.

In the light of this judgment we accept that the UK exemption for insurance related services in Group 2 of Schedule 9 is drawn too widely. However, UK law has not yet been amended to take account of the judgment. As part of the wider EU Review of VAT and Financial Services, the European Commission is considering the VAT treatment of insurance related services and it has been decided to defer any changes to UK legislation pending progress in this review. Any necessary amendments to the law will be made in due course and this guidance will be updated accordingly. Until then, businesses are able to rely on UK law as it is currently drafted and on published policy.

This means that until such time as the law is amended, some services which currently fall within the UK exemption at Item 4, for example claims handling or the administration of contracts of insurance provided separately from introductory services, can continue to be treated as exempt even though they fall outside the exemption in the Principal VAT Directive following the Andersen Judgment. However, if a business wishes it may apply ‘direct effect’ of EU law and treat such services as taxable.