EU provides VAT relief
European change to foreign exchange rules will cost Customs #100m a year, reports Lawrie Holmes.
Customs & Excise faces VAT repayments of #100m a year after a European Union ruling over foreign exchange dealings with non-EU countries.
It follows the European Court of Justice’s decision on a case brought by the First National Bank of Chicago, which confirmed the Advocate General’s view that forex transactions constituted supplies for VAT purposes and therefore offered a right to tax recovery. Many banks have already submitted claims which could date back to 1992.
Customs said it would be issuing information to companies on how to incorporate the decision into business.
Accountants warned that other businesses with forex operations may suffer as a result. Companies seeking to retrieve VAT could face a conflict with Customs, which is considering banning companies from VAT groups which make use of exempt supplies.
KPMG’s indirect tax partner Graeme Ross said: ‘The expulsion of a business from a VAT group could place enormous compliance burdens on businesses as a result of normal commercial activity.’
The euro’s introduction is likely to increase the amount of recoverable VAT in coming years. But Ross warned that the method of valuing transactions put forward by the ECJ could be extremely complex.
‘To prevent a restriction being applied to VAT recovery, and possible exclusion from the VAT group, businesses will need to carefully plan how they organise forex transactions,’ he said.
TAX RELIEF FOR UK SUBSIDIARIES
The ECJ has ruled that tax relief between separate subsidiaries of a UK holding company is possible even if the majority of the holding company’s business is carried on through foreign subsidiaries. Previously, relief was only possible if a majority of business was through UK subsidiaries.
The ECJ deemed the law was unjustified discrimination, contravening the Treaty of Rome’s ‘freedom of establishment’ principle. But David Cooke, PricewaterhouseCoopers’ international tax partner, said an EU-based parent with companies in the UK could ‘offset profits against losses for tax purposes’.