Insurers liable for millions in VAT on internal services

Banks, insurers and other financial services firms across Europe face extra VAT costs running into £100 millions in the UK alone, following an ECJ judgment today. The ruling means services supplied between a group’s headquarters and its branches may now be subject to VAT.

Today’s judgment concerned Skandia America Corporation and the Swedish Tax Authority. Other tax authorities across the EU will now consider how they implement the rules.

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.”

Richard Iferenta, head of financial services indirect tax at KPMG in the UK, added:

“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”.

He added, “what is surprising here is that the final judgment issued by the Court runs somewhat contrary to the earlier ‘Opinion’ issued by the Advocate General in this case when typically the Opinion is indicative of the likely final decision.  The UK government had argued strongly that the UK’s position on this issue, which included targeted anti-avoidance rules to prevent any abuse, was consistent with EU law and that there was no need to change the status quo.  The Advocate General appeared to largely agree with this in their earlier opinion so this change of stance by the full court was unexpected.”

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1 Comment on Insurers liable for millions in VAT on internal services

  1. George Eccles // 22 September 2014 at 10:00 am // Reply

    If the VAT is due to the country in which the branch is resident, not the head office (as is the case with the Skandia issue) then this is going to benefit all the foreign jurisdictions not the HMRC.

    This case relates to the Swedish branch of an American company. VAT is payable by the Swedish branch to the Swedish Tax authority.

    For comparison (if it followed suit) the Taiwan branch of Prudential UK will have to pay Taiwan VAT on any services provided by the head office in London – no change on what the UK tax authorities receive.

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