UK financial services firms, particularly insurers and banks, will be affected by a ruling on VAT by the European Court of Justice (ECJ) costing up to £100million.
A judgement yesterday by the ECJ concerning Scandia America Corporation and the Swedish Tax Authority means that transactions between branches will now be as standard charged VAT, with potentially serious increases in the amounts of VAT companies being charged.
Traditionally companies which conducted transactions across borders between different branches were not obliged to pay VAT on them.
The ECJ has previously ruled on similar cases and this case now makes it likely that governments will be able to charge a VAT group VAT on a transaction with a branch which is part of a different tax regime.
For the insurance sector costs could be considerable for companies working across borders, PWC warned.
Stephen Morse, tax partner at PwC, commented: "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 the external costs. Many financial services firms will see their VAT bills soar.
"It's surprising the ECJ 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."
