The European Commission has said it will modernise rules on VAT for the financial services sector in the wake of a ruling at the European Court of Justice.
The court ruled last March that insurance companies would have to pay VAT on outsourced back office services. The decision effectively increased the cost of such operations by 21 per cent, providing a headache for insurers and those companies specialising in such outsourced services.
However, in a round-table discussion hosted by accountants KPMG, the commission said it was "very probable" it would start formal discussions with member states on modernising VAT rules for financial services next February. It is understood the commission hopes to introduce the new rules next October, although industry sources suggest that might prove an overly optimistic target.
More significantly, in the interim the commission has suggested states, including Ireland, refrain from amending their legislation to conform with the ruling.
KPMG director of VAT Keith Loughman, who is also global chairman of its financial services indirect tax network, said he expected that, in the light of the commission's comments, Revenue would "continue to apply the current VAT exemption for outsourced services on the basis of existing Irish legislation".
He said the VAT regime review would be welcomed, and urged the industry to become involved in the consultation process. "The VAT laws in this area are about 30 years old and no one envisaged the speed of change in the sector in that time.
"The situation is a bit of a mess and there is a need to bring the law into line with modern business realities in the industry."
Mr Loughman said the ruling was causing problems and the figures involved were significant. "In our view, there is a real opportunity for the Irish financial services industry to play a part in the debate and to shape the future of the financial services industry," he said. "If we are serious about being a financial services centre, our involvement in this process will be seen as critical."
