Consumers face another increase in premiums for home and motor insurance after a European Court of Justice ruling.

The court ruled in a Polish case that work insurers outsource to claims handlers is not exempt from VAT.

That leaves insurance companies – themselves exempt – facing up to 23 per cent higher costs for the work they outsource on managing and settling claims, and on other back-office functions.

Irish market

The full financial cost of the latest ruling is unclear but it will run into millions. Industry sources confirmed most of the 40 insurers in the Irish market outsource their claims handling business.

The eventual cost to companies, and inevitably customers, will depend on the cost of that part of their business and the VAT burden.

“This is a major judgment,” one tax specialist said last night.

“It is pretty clear-cut, succinct and to the point. And it could, and probably will have an impact here.”

Another specialist in the sector, KPMG VAT partner Terry O’Neill said: “The judgment comes as no surprise in light of prior case law of the ECJ in the area of insurance-related outsourced services.”

He said there would be no immediate change to the current position where such “delegated” business is deemed exempt under Irish law.

“The longer-term impact will depend on how Revenue interprets and applies the judgment.”

In a statement yesterday, the Revenue said it was “currently considering the judgment and its possible implications for Irish VAT law”.

And Insurance Ireland, the umbrella body for the sector, said it was considering the implications of the judgment, in what is called the Aspiro case.

“Given the complexity of the judgment and the fact it was only handed down last week, we are unable to comment in detail at this time.”

The industry group was unable to say how many insurers in Ireland outsource their claims handling or the value of that business.

The ECJ ruling in fact confirms a 2005 judgment on the same issue, which again found VAT should be applied on such business.

Governments, tax authorities and the industry in several affected countries had deferred acting on that ruling pending an EU review of financial services and VAT.

However, that review has collapsed in recent months and this judgment makes the likelihood of a tax charge much more likely.

Second blow

It is another blow for insurance companies and their customers just weeks after the court of appeal ruled the industry had to pick up a €90 million tab to settle 1,750 claims outstanding in the wake of the collapse of Malta-registered Setanta Insurance.

That is expected to add €50 to the average annual motor policy premium.

"This will be a major setback for the UK and Irish insurance industries which have been at the forefront of outsourcing many non-core activities," said Richard Asquith, vice-president of global tax at VAT technology company Avalara.

He said the industry in Ireland and the UK had been living on “borrowed time”.