Firms warn of danger in VAT plans

LONDON'S STATUS as Europe's leading financial centre is under threat from Budget proposals to end the VAT exemption for services supplied to financial companies, leading accountants warned last night.

Marc Welby, VAT partner in the financial services office of Ernst & Young, said Customs & Excise's plan to charge VAT in relation to lending and card operations that banks and other financial institutions outsource to third parties could add hundreds of millions of pounds of costs when such organisations are struggling to compete and overcome the effect of Britain being outside the single European currency.

"What Customs is trying to do is rewrite legislation to undo the effect of court cases," Mr Welby said. He added that, as the proposal appeared to go against European Union law, it was "inevitable that this is going to end up in litigation".

Companies are also angry about plans to combat perceived abuses of VAT groups, which allow companies within a single organisation to make transactions without incurring the tax.

They welcomed the fact that Customs seemed to have accepted claims that big changes in this area would have led to great administrative complexity. "Few issues have excited industry as much as that," said George Michie, UK head of indirect tax at KPMG. Had the measure gone ahead many mobile businesses would have moved overseas, he said.

But tax experts pointed out that the announcement that Customs would in future be able to remove companies from VAT groups where it was felt "necessary for the protection of the revenue" almost amounted to the same thing. Mr Welby said it was likely to create "months, if not years of uncertainty".

Accountants also stressed that, although the decision to impose employers' national insurance on benefits in kind looked like a simple attempt to align income tax and NICs, it amounted to a major change and a significant extra cost.

The Treasury estimates that the move, under which perks such as loans and life insurance would be treated the same way as straight salaries, will raise about pounds 415m in the first year from April 2000, rising to pounds 440m the year after.

However, Mike Kenyon of Ernst & Young's national insurance group said it would create a lot of extra administration for companies, leading many to consider paying employees in cash and leaving them to provide their own benefits.

Maurice Parry-Wingfield, a tax consultant at Deloitte & Touche, said the rise in stamp duty for the third successive year threatened to depress property values and affect loan security.