Insurers and policyholders could face increased costs following a European Court of Justice decision that claims handling should not be exempt from VAT.
The ECJ released its decision in the Aspiro case. The Polish firm provides claim handling services to an insurer - dealing directly with the customer on behalf of that particular insurer.
The case queried whether claims handling services should be subject to VAT under European law as insurance-related activities are exempt from VAT.
However the ECJ deemed that the claims firm was not a broker or insurer and it's activities did not specifically provide insurance.
It ruled that claims handling should be subject to VAT.
Richard Insole, indirect tax partner at Deloitte, said: "The decision in this case highlights the clear difference between the expected VAT treatment of claims handling in UK and EU law. If HMRC are required to reassess their VAT position in this area, it could result in significantly increased operating costs for UK insurers and an impact on policy premiums as a result.
"The outcome of the case will be viewed by many as unsurprising given previous judgements of the European Court in this area dating back as far as 2005. Until now, HM Revenue and Customs have resisted changing the UK's treatment of such services on the basis that the European Commission has been undertaking a wider review of the VAT treatment of VAT and financial services.
"However, this exercise was recently abandoned, leaving a question mark over whether the UK can continue to support its current treatment."
On how HMRC might react in the UK, Insole added: "Exactly what HMRC intend to do next is not yet known, but our expectation is that following this decision, HM Revenue and Customs will come under increased pressure from the European Commission to change UK law."
When asked about particular services that could be affected, Insole said: Quite a lot of outsourced services are currently exempt. The law specifically allows for: i) claims handling; and ii) the administration of insurance contracts.
"Some of this could include: collecting premiums, dealing with customer queries, updating policy details, receiving claims, validating claims, coordinating fulfilment of claims and so on."