The financial services sector is preparing to be hit with extra VAT costs running into tens of millions pounds if a European Commission proposal gets the go ahead.

The EC has issued a warning to members to tighten rules around VAT grouping, which allows unrelated companies to form a group and pass VAT exemptions on to businesses within the group.

Alan Sinyor, head of VAT at City law firm Berwin Leighton Paisner, said partially VAT exempt businesses, such as banks and insurance companies, are likely to be stung if the move goes ahead.

'It's something which has been on the horizon so people should be aware. There's tens of millions of pounds at stake if businesses don't take preventative action now. It's an administrative burden for all groups and there's a lot of work in checking we meet the new guidelines,' he said.

According to Tom Kivlehan, VAT partner at BDO Stoy Hayward, there is real concern for financial services clients taking on corporate finance transactions as it will add to acquisitions complexity and cost. But, he added: 'Until we see how HMRC are going to react it remains nebulous. Hopefully they consult before they make any changes,' he said.

An HMRC spokesman said: 'We are aware of the Commission's latest publication seeking views on VAT grouping, and we are currently reviewing the document's contents.'

Further Reading:

VAT evasion on imports tackled by European Council

HMRC praises VAT fraud strategy