BANKS operating in the UK face extra tax payments worth hundreds of millions of pounds under rules enforced by Europe’s top court.
The European Court of Justice dictated on Wednesday that VAT must be charged on services provided to companies by their overseas offices.
The ruling means that many financial services companies in London, such as banks and insurers, are likely to be faced with substantially-higher tax bills.
It is the latest controversial blow to the City handed down from Europe, with experts warning the judgement will disproportionately affect the UK financial services industry.
Previously, services such as IT and call centre operations provided to a bank from a foreign offices were not charged the 20pc tax, as they were deemed to be within the same “VAT group”.
However, the ECJ, in a case related to the Swedish insurer Skandia, said these services should be subject to VAT.
The ruling does not specifically set a precedent for financial services groups, but since the products and services they sell, such as mortgages and insurance, are largely exempt from VAT, the extra VAT banks will have to pay translates to a direct operating cost.
Both British banks that receive services from foreign offices, and the UK subsidiaries of banks headquartered elsewhere, are likely to be affected.
“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,” said Richard Iferenta, head of financial services indirect tax at KPMG.
“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… the financial impact of the judgement may be felt hardest in the UK.”
Stephen Morse, a tax partner at PwC, 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.”
Europe’s intervention in the financial sector has been heavily criticised by those in the industry as well as at the Treasury. The Government is currently trying to overturn the EU’s bonus cap, having seen setbacks over its opposition to a financial transaction tax and short-selling restrictions.
–The Telegraph
