Banks and insurers in Europe are bracing themselves for extra VAT bills that could potentially run into billions of euro, following an unexpected decision by the European Court of Justice.

The ruling, on a dispute between Skandia America Corporation, a US arm of the international insurer, and the Swedish tax authority, means that services supplied between a group’s headquarters and its branches are set to be subject to VAT.

The ruling means that previously VAT-free services will now be subject to the tax. The banking and insurance industries will not be able to recover the VAT charges in the way other businesses can, resulting in significant extra costs.

The ruling concerns the costs shared between the head office and its branches in other countries, which will now become liable to VAT. Until now, European law allowed countries to treat companies and their overseas branches as single entities for VAT purposes.

– (Copyright The Financial Times Limited)