EU adds VAT on banking and insurance financial services group charges

Wed 17th Sep 2014

The European Court of Justice (ECJ) ruled on 17 September 2014 in the Skandia America Corporation vs Swedish tax authorities case that recharges of bought-in costs or provided by financial services group companies to their branches and subsidiaries in other EU countries will be liable to a VAT charge.  Until this ruling, foreign subsidiaries were treated as combined with their holding companies, so no VAT due on any intra-group invoices was due.

This ruling creates a multi-billion charge across Europe as the subsidiaries will not be able to reclaim this VAT charge since they are not VAT registered themselves since financial services are exempt from VAT.

The UK alone stands to face a bill in excess of GBP100 million per annum as London is a major financial services capital with many groups sharing and cross-charging services across subsidiaries around Europe.  These may now attract VAT at the UK rate of 20%.

The decision comes as a surprise since the issue of the financial services VAT exemption had been parked by the EU member states in 2010 following the failure to agree on how to implement VAT on banking or insurance.  In particular, countries could not agree on the charges between banks or insurance companies for their outsourced administrative and back-office supplies.

The 2005 Andersen case at the ECJ had indicated that VAT would have to be levied on these charges.  But the UK had won a reprieve until all member states could agree on the exact scenarios where this would apply.  This new case potentially overrules this reprieve.

Last week, Poland announced that it would withdraw the VAT exemption on financial services outsouring.  This follows the position of Germany.