Services supplied between a group’s headquarters and branches could now be taxed

UK insurers could face an additional value-added tax bill of hundreds of millions of pounds following a ruling today, top accounting firms said.

A judgement handed down today by the European Court of Justice means that services supplied between a group’s headquarters and its branches may be subject to value-added  tax (VAT).

Accounting firm PwC said that as a result “banks, insurers and other financial services firms across Europe face extra VAT costs running into £100 millions in the UK alone”.

The judgement concerned Skandia America Corporation and the Swedish Tax Authority. Other tax authorities in the European Union are now considering how to implement the rules,. PwC said.

PwC tax partner Stephen More 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 the external costs. Many financial services firms will see their VAT bills soar.”

He added: “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.”

KPMG’s UK head of financial services indirect tax Richard Iferenta 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.”