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Financial services firms in Europe to see surge in VAT bills

Thu 18 Sep 2014

A ruling by the European Court of Justice could lead to financial services providers across Europe facing an increase in their VAT bills.

In the case involving Skandia America Corporation and tax authorities in Sweden, the ECJ ruled that VAT should apply to services supplied between the headquarters of an organisation based outside the European Union and its branches within the international bloc.

According to PricewaterhouseCoopers (PwC), this means the VAT net for financial services has been "significantly" expanded.

Stephen Morse, tax partner at PwC, said banks and insurers are likely to be affected the most, as head office costs are often shared between an organisation's subsidiaries.

He described the ECJ's conclusion that any supply between a company's headquarters and its branches should be liable to VAT as a surprise, as he believes it would have made more sense to focus on "specific scenarios".

Mr Morse said how the ruling will be interpreted by different countries remains to be seen, which means there will be "considerable uncertainty in the financial services sector" until then.

Richard Iferenta of KPMG also expressed surprise at the ruling, as he believes it contradicts a statement from the advocate general regarding this case "when typically the opinion is indicative of the likely final decision".

He pointed out that the UK government's position on the matter had been consistent with EU law, which meant no change in the status quo was required.

Mr Iferenta stated that since the advocate general had "appeared to largely agree with this", the change in stance by the full court in "unexpected".

He added that if a restrictive interpretation of the judgement is taken in the UK, any transactions "with a branch that is in a VAT group will be impacted".

Furthermore, he noted the financial impact of the ruling is likely to be "felt hardest in the UK", since the country is a global financial services centre that relies heavily on investment from businesses in other countries.

Robin Dabydeen, a partner at Winckworth Sherwood, commented: "This is a significant ruling by the ECJ, which is likely to have a major financial impact on exempt members of multinational groups that receive cross-border intra-company supplies of services. It now remains to be seen whether HMRC will extend its existing anti-avoidance rules as a consequence of this ruling to catch any services (including re-charged internal costs, which is a crucial element in cost sharing) provided by the head office to a UK VAT group branch."

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