Insurers and other financial services firms are likely to face huge tax bills running into hundreds of millions of pounds annually, following an European Court of Justice ruling, two major accountancy firms have warned.
Until now, European VAT law had permitted EU member states to, at their discretion, allow companies in their territory under common control to be treated as a 'single taxable person' for VAT purposes. These grouping arrangements meant that groups could share common services amongst themselves without incurring VAT.
But on September 17, the ECJ ruled that where a VAT group is operated in a member state and receives services into a branch with the VAT group from its main establishment located outside the EU that service should be subject to VAT.
Responding to the ruling, KPMG said services that had been largely VAT-free would now be subject to the tax which in the UK is levied at 20%.
Richard Iferenta, head of financial services indirect tax at KPMG, said: 'What this ruling does is, at a stroke, add hundreds of millions of pounds to the annual cost of financial institutions doing business in the UK and other EU member states.
'It's clear that if the UK takes the most restrictive interpretation of the judgement any transactions with a branch that is in a VAT group will be impacted. Furthermore with the UK's position as a global financial services centre and the consequential level of inward investment into the UK by foreign financial services business that flows from that, the financial impact of the judgement may be felt hardest in the UK.'
At PwC, tax partner Stephen Morse said: 'The case significantly expands the VAT net for financial services firms. Banks and insurers are likely to be affected most.
'It's standard for head office costs to be shared between a group's subsidiaries. Any internal costs between a firm's branches will now face VAT, rather than just external costs. Many financial services firms will see their VAT bills soar.'
He said it was 'surprising' that the ECJ had decided any supply between a firm's headquarters and its branches is liable to VAT, rather than focusing on specific scenarios.
'We need to see how different countries will interpret the ruling, and until then there will be considerable uncertainty for the financial services sector. Banks and insurers need to consider how they could be affected.'