Tax issues: UK insurers may end outsourcing to India

UK insurers have urged the government to delay implementing a European ruling on the tax applied to outsourced insurance services.

This, the insurers say could increase their tax burden by over 200 million pounds ($354 million).

The additional tax will also reduce the attractiveness of offshoring insurance services, so it could halt or limit the recent trend to move insurance jobs overseas.

The Association of British Insurers (ABI) on Thursday called on the UK tax authority, Customs & Excise, to delay implementation of new value-added tax rules, which are due to take effect from the start of 2006.

In March, the European Court of Justice ruled that some back-office activities outsourced by insurers were not exempt from value added tax (VAT).

This could be potentially a big blow to insurance firms outsourcing these functions to save money.

“Our view is they (Customs and Excise) are rushing into it without fully considering the implications,” John Breckenridge, acting head of taxation and accounting for the ABI. “January 1 is simply not practicable. We are looking for a delay until at least 2007.”

He added that the ABI had a good relationship with Customs and Excise. “We can’t be sure what they will do. But we feel our argument that their guidelines need more clarification will weigh quite heavily with them to get them to move (the date back),” he said.

Customs and Excise indicated it could heed the request. It has been consulting the industry on the changes, with the deadline for feedback this Friday.

“We’ve suggested a possible date and we’ll look at the feedback, that’s part of the consultation process,” a spokesman for Customs and Excise said. “Nothing’s set in stone.

Comapanies like Aviva have taken advantage of outsourcing agreements as Customs and Excise has granted insurers fairly wide value added tax (VAT) exemptions for a range of services.

Thousands of administrative jobs, such as call centres, claims handling, loss adjustment and back office processing have shifted to India and other countries.

Breckenridge acknowledged that the way the exemption has worked in the UK “has probably been more liberal than in lots of other member states”.

He estimated the change would cost ABI’s members — who provide 94 per cent of UK insurance business — at least 200 million pounds.

He said this could see insurers re-negotiate contracts with outsourcing providers or prompt some services to be brought back in-house — potentially expensive and a major change in policy.

“I don’t know if it will stop the trend in its tracks, but it certainly adds a cost and makes it more of an issue to consider,” he said.

Breckenridge said the that main impact would be on insurers’ bottom line. “The danger is that insurers will simply have to bear this extra cost.

Some might get passed on to consumers, while some might get passed on to the outsourcing companies.

But a lot is going to stick with the insurers, which obviously reduces their profits and reduces their ability to offer services and make further investments in the UK,” Breckenridge added.

Prudential Insurance said it would urge Customs and Excise to agree to the delay “to allow more time to iron out the uncertainty about the implementation.”

A spokeswoman said, however, it was too early to say whether its outsourcing policy would alter due to the tax change.