Friday, March 04, 2005

We have become more powerful VI

"And for all of those that say, if you look at the last thirty years, we have lost power to Brussels, actually it isn’t true. In the last, certainly in the last eight years, as we, the Labour government, have been more involved in Europe, so we have become more powerful and more prosperous, better able, literally to implement a patriotic case for the European Union."

Jack Straw
Foreign Secretary

BBC Today Programme, 9 February 2005

Last month it was an ECJ ruling that VAT should apply to works of art imported into the United Kingdom for auction, which had originated from outside the EU.

Today we learn, courtesy of The Daily Telegraph that the ECJ has made another VAT ruling that "will add £100m" to insurance premiums.

According to the Telegraph, the ECJ has told the UK government that it must charge VAT on "outsourced insurance services" and it is that ruling which could add the £100m to UK insurance premiums.

These services include such tasks as the handling of claims and contract amendments and so far have been exempted by the government as part of wider legislation designed to encourage people to buy insurance.

The issue arises through a test case taken against the consultancy Arthur Anderson, now called Accenture, which was told should pay VAT on back office services to the Dutch government. Other EU member states will also have to adopt the principle.

The Telegraph cites Frank Sangster, a senior tax adviser at KPMG, who says that while it was impossible to calculate the exact cost to the UK insurance industry, an extra 17.5 percent on the UK's biggest outsourcing contracts added up to more than £100m to the industry's costs.

Competition among insurers might compel the industry to swallow the extra cost, but Mr Sangster believes it is more likely to translate into higher individual premiums.

Paddy Behan, a tax expert at financial adviser Grant Thornton, said: "The UK has tended to be quite liberal on the VAT treatment of insurance agents. But if the government takes an extreme reading of this ruling, it will be a nuclear winter for the insurance industry."

And that winter is set to get worse. Outsourcing companies outside the EU remain exempt from VAT but the EU plans to close the "loophole" by 2007.

So, once again, we see a policy initiated by the UK government – this one specifically to promote the purchase of insurance by the public – overturned by the EU, in the form of its supreme court, the ECJ.

And that is despite that fact that we have become "more powerful" – or so Jack Straw claims. Heaven knows what might have happened if we had not become so powerful.

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