Modernising VAT
This guide was last updated on 20th February 2008.
On 5th December 2007, the European Commission adopted proposals
for a directive and a regulation that will update the VAT regime
governing the treatment of financial services and insurance.
Modernisation is long overdue. Financial services and insurance
have generally been exempted from VAT since 1977 but the
legislation has not kept up with industry developments. Nor is the
exemption applied uniformly across member states.
Increasing uncertainty has led to a growing number of cases
going to the European Court of Justice. One area that has
caused particular problems is the scope of the exemption for
insurance brokers and agents.
Definitions
The Commission's first aim is to update the definitions of
financial and insurance services to create greater legal certainty.
The conditions for applying the exemption would be based on
objective economic criteria and the nature of the services
concerned, not on the persons supplying the services.
For instance, in place of the current wording ("related services
provided by insurance brokers and insurance agents"), the exemption
would cover "intermediation" in insurance and reinsurance. This is
defined as "the supply of services rendered to, and remunerated by,
a contractual party as a distinct act of mediation in relation to
the insurance…transaction…by a third party intermediary".
The new definition would be backed up by a regulation setting
out a non-exhaustive list of examples covered or excluded by the
exemption.
Hidden VAT
Redefining the exemption is relatively uncontroversial. More
difficult will be achieving the Commission's second aim: to reduce
the impact of "hidden" (non-deductible) VAT on the costs of
economic operators.
Financial and insurance companies cannot deduct input VAT on
services or goods supplied to them (such as outsourced services or
computers) because the services they supply themselves are
exempt.
The Commission wants to address this by making it easier for
banks and insurers to choose to tax their services if they wish.
The current VAT Directive allows this but only at the discretion of
member states and the option is not widely used. The Commission
believes it should be equally accessible across the
Community.
The more successful the Commission is in reducing this cost,
however, the less money national treasuries will get. Member states
will be very conscious of the revenue implications of any change
and will approach the eventual proposal with a critical eye.
The Commission also proposes to clarify and extend the tax
exemption for cost sharing arrangements, including those which are
cross-border. This will allow institutions to pool operations and
share costs between group members without creating additional
non-recoverable VAT.
Next steps
There is still a long way to go. The proposed directive and
resolution will need to be agreed unanimously by all member states
following consultation of the European Parliament. The UK Treasury
estimates this could take between three and five years.
Contact: John Christian (john.christian@pinsentmasons.com
/ 0113 294 5296)
