Insurance companies in the UK will pay up to £200 million ($463 million) more tax a year after a landmark ruling by the European Court of Justice on outsourced insurance services.

The court found in March that many outsourced insurance company back office functions, including call centres and claims functions, should not be exempt from the UK Value Added Tax (VAT) system.

The British Government has now announced that it plans to introduce the new VAT rules on January 1. They are a major change from its former liberal interpretation of taxes on outsourced services.

But the Association of British Insurers (ABI) says the January 1 deadline is not practical, and wants at least another year to allow the industry to adapt to the changes.

ABI’s Director of Financial Regulation and Taxation, Peter Vipond, says many smaller insurance companies, which tend to outsource many of their services, will be hit particularly hard.

UK insurance-buyers already pay about £2.6 billion ($6.02 billion) in premium taxes and the industry has “irrecoverable” VAT payments of £1 billion ($2.3 billion).

“The UK has a highly efficient insurance industry, and many specialist and administrative functions are outsourced,” Mr Vipond said. “These changes must not be rushed through until the full implications for the UK industry have been considered.”

Institute of Insurance Brokers Director-General Andrew Paddick has urged the Government to take a “robust stand and do everything possible in its power” to resist the change.

He says the UK “is already witnessing an accelerating loss of operations/jobs in its financial services sector to overseas locations and the introduction of further taxation can only act as a stimulus”.