The Commission has launched a consultation which looks at
changing the current legal framework, as set out in the Sixth VAT
Directive of 1977. Since implementation, the provisions in this
Directive which govern the treatment of financial services and
insurance have never been re-visited legislatively. A re-visit is
overdue, it appears.
The 1977 legislation exempts financial services and insurances.
This creates "hidden VAT" charges in supplies from financial and
insurance services providers to other businesses. Indeed, they
cannot deduct input VAT on services or goods (e.g. computers)
supplied to them because the services they supply themselves are
exempt. Their charges to customers will therefore reflect this VAT
cost and, as it cannot be recovered by business customers, cascades
through the system, increasing the cost of the goods and services
they themselves supply.
There are other problems.
Hein Blocks, Chairman of the European Banking Federation's
Executive Committee, said the current VAT regime "is a major
obstacle to cross-border consolidation in the banking sector and
puts banks at a competitive disadvantage compared to non EU
competitors."
The Association of British Insurers (ABI), whose members provide
over 97% of the insurance business in the UK, says insurers suffer
additional VAT costs purely as a result of outsourcing
insurance-related activities, a cost ultimately borne by the
policyholder. This was the accepted UK practice; but a recent case
before the European Court of Justice threatens to charge VAT on
outsourced insurance services.
The ABI also points out that VAT rules discriminate against
insurers doing business across borders in the EU by creating
additional tax costs which would not arise in a fully VATable
business or where the business is in only one country. The regime
should allow an insurer to compete in the international market on
the same terms as other industries, says the ABI.
The Commission agrees that VAT should be applied in a manner
consistent with a level playing field. It says it wants to ensure
that insurance and financial services customers are not left with
"hidden VAT". It also wants budgetary security for Member States, a
cut in the administrative charges for the economic operators
concerned and an improved definition of exempt services, creating
more legal security for Member States and economic operators, and
the removal of competitive distortions between supplies across
different Member States.
The consultation has been welcomed by the ABI. Peter Vipond, ABI
Director of Financial Regulation and Taxation, said: "We are
pleased that the EU Commission recognises the current VAT regime
does not meet the needs of the 21st Century and we urge Member
States to use the review to enhance the EU’s competitiveness in a
global economy."
Responses from interested parties should be made by 9th June
2006. The Commission then intends to submit a legislative proposal
by the end of 2006 for modernising the current legislation on
financial services and insurances.
