UK concerned EU Vat ruling may prove costly for banks

UK authorities are examining whether the country needs to apply an EU court ruling that could add hundreds of millions of pounds of taxes to banks and insurers.

Vat can be levied on services supplied by a head office outside the EU to a unit in the 28-nation bloc, the EU’s top court said yesterday. Sweden has the right to tax Skandia America for providing information technology services to a Swedish unit as the branch is seen as a separate entity in respect to vat, the Court of Justice said.

UK tax authorities are “considering whether the judgment has any application to UK grouping provisions, which are different to those in Sweden”, said Michel Rubini, a spokesman for UK Revenue and Customs.

The differences between Swedish and UK law may offer wiggle-room in applying the ruling, said Richard Iferenta, head of financial services indirect tax at KPMG.

If the ruling is applied across the EU, it could “add hundreds of millions of pounds to the annual cost of financial institutions doing business in the UK and other EU member states.” .

While manufacturing companies, such as carmakers, can recover vat, it is a fixed cost for financial services firms.

“Suddenly doing your business internally as a global institutions could become 20% more expensive,” said Gary Campbell of Deloitte.

Financial services companies may need to think about restructuring or moving offshore entities into the EU as a result.

Contrary to Sweden, a Vat grouping in the UK includes both head office and branches, Iferenta said.

Consequently, it could be argued a branch established in the UK isn’t a separate legal entity and that Vat can’t be applied.

KPMG will “actively explore” such legal arguments, Iferenta said. The UK will need “political will” to go down this route, he added.

The British Bankers’ Association declined to comment on the ruling.