EU – German case may lift multi-million UK financial services VAT threat

Wed 11th Mar 2015

New legal action by the European Commission (EC) against Germany may put to rest a long-standing EU threat to raise the outsourcing tax bill of UK banks and insurers my hundreds of millions of pounds.

EC takes Germany to European Court of Justice

Last week, the EC referred Germany to the European Court of Justice (ECJ), the highest court of appeal for EU legal issues regarding its narrow group German VAT rules. The rules limit VAT exemptions on outsourcing of shared services to just the health sector. The EC had already warned Germany in June 2011 that excluding banks, insurers and others from this benefit was in contravention of the EU VAT Directive. Since Germany has taken no action, the EC has moved to the next step in proceedings, a court hearing at the ECJ.

VAT threat to UK banks and insurers

If successful, the case will overturn a 2005 ruling (Andersen C-472/03) that banks or insurers were not entitled to VAT exemptions on their outsourced administrative operations. In the UK, HMRC decided to continue with the exemption for the time being due to uncertainties. However, German and other EU member states, attempted to force through the removal of the exemption via the failed EU VAT Directive on Financial Services.

After many years of fearing a devastating multi-million pound VAT bill, UK and Irish financial services institutions will be relieved that the Commission is looking to formalize the tax exemption through an ECJ hearing with Germany.