The ruling means services supplied between a group’s headquarters and its branches may now be subject to VAT.
Until now, services such as IT and call centre operations provided to a bank from foreign office were not charged the 20 per cent tax, as they were deemed to be within the same “VAT group”.
Yesterday’s ruling concerned the Swedish insurer Skandia, which the ECJ said was now liable to pay VAT on cross-border services.
Stephen Morse, tax partner at PwC, said: “The case significantly expands the VAT net for financial services firms. Banks and insurers are likely to be affected most… Any internal costs between a firm’s branches will now face VAT, rather than just the external costs. Many financial services firms will see their VAT bills soar.
“It’s surprising the ECJ decided any supply between a firm’s headquarters and its branches is liable to VAT, rather than focusing on specific scenarios.”
He added that this would lead to ”considerable uncertainty for the financial services sector.”