The decision concerned Skandia America Corporation and Sweden’s tax authority, which effectively means that services supplied between a group’s headquarters and its branches may now be subject to VAT.
Currently, services such as IT are VAT-free across group businesses but the prospect here is that they will now be subject to VAT which, in the UK, is levied at 20%.
Richard Iferenta, head of financial services indirect tax at KPMG in the UK, said: “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.”
He added 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 said.
According to KPMG, the next stage in the process is for the tax authorities in all the EU member states to consider the ECJ’s decision and decide how it impacts their local tax legislation.
