Tax officials no longer giving ‘rubber stamp’ following German VAT ruling on Swiss Re

The UK tax authority has changed its procedure on reinsurance portfolio transfers and is no longer offering a fast route for companies to avoid VAT payments.

Previously, UK insurers and reinsurers were able to secure exemption from VAT in advance of their transactions, by stating why their forthcoming transfer qualified as a 'Transfer-of-a-Going-Concern’, which is exempt from VAT.

Now, pre-clearance of this kind has been stopped by the UK tax authority.

Reinsurers believe it signals a tightening of the rules by tax officials after Swiss Re was ordered in October 2009 to pay €2m to tax authorities in Munich, Germany, for the transfer of 195 life insurance portfolios from a German subsidiary to the Switzerland-based parent in 2002.

The case was decided by the European Courts of Justice which set a precedent for all European Union tax authorities.

Peter Taylor, a partner in the London office of law firm Lovells, said insurers and reinsurers in the UK and throughout Europe had been expecting a more stringent application of tax rules since the court decision.

“The end of pre-clearance is in line with that general expectation,” he said.

"It means 'Transfer-of-a-Going-Concern’ criteria will have to be more carefully proved. This development has put a bit of a crease in the resolution end of the market. Tax represents hostile country for insurers at the moment.”

Tax authorities throughout Europe are currently thought to be analysing previous portfolio transfers and could retrospectively request VAT if the transactions failed to meet ’Transfer-of-a-Going-Concern’ criteria.

However, the UK tax authority told Global Reinsurance it has not yet made any requests for VAT from UK insurers and reinsurance.

A spokeswoman for Her Majesty’s Revenue and Customs [HMRC, the UK’s tax office] said: “HMRC has not to date made any requests for VAT to be paid by UK insurers or reinsurers following the judgment of the European Courts of Justice in the Swiss Re case and would not, however, seek to recover VAT on transfers of insurance portfolios within the UK that met the relevant tests for treatment as transfers of going concerns for VAT purposes.”

She added: “HMRC’s strict duty of confidentiality means we cannot comment on the tax affairs of individual businesses under any circumstances.”

The statement leaves open the possibility of a retrospective application of VAT on transactions which failed to meet its ‘relevant tests’.

If any company were to be caught out, it is not clear how VAT would be levied and whether it would apply to premium level, reserves or exposure.