On 9 November 2020, the Chancellor confirmed that, from 1 January 2021, UK businesses which supply certain financial and insurance services (specified supplies) to customers located in the EU would be able to recover VAT on associated costs.
This means that the treatment for both EU and non-EU customers will be the same after Brexit. This is welcome news for UK businesses operating in those sectors as it provided certainty after a period when it wasn’t clear how HMRC intended these supplies to be treated and could also represent a significant VAT saving for UK financial service providers.
Under the current UK VAT legislation (Value Added Tax (Input Tax) (Specified Supplies) Order 1999 (SI 1999/3121)), a supply of ‘specified’ exempt supplies still gives the right to input tax recovery for a UK supplier which makes supplies of insurance and financial services customers outside the EU. The list of ‘specified supplies’ are:
- supplies of finance, insurance services, or investment gold to customers in countries outside the UK or EU; and
- supplies of insurance or finance services (including intermediary services) which are directly linked to the export of goods outside the UK or EU
Under the existing rules, businesses making these supplies suffer a VAT cost on the inputs used for making supplies to UK and EU customers.
Businesses which make supplies to non-EU customers who would not otherwise have any right to register for UK VAT can also voluntarily register for VAT in the UK to recover VAT on costs incurred in making these supplies.
The government previously published Regulations in 2019 which suggested the specified supplies rules would be extended to include supplies to EU customers – given that these EU Member States would be ‘third countries’ after Brexit – if there were no deal agreed. However, the Regulations were never enacted and until last week businesses had no certainty whether the UK would implement these changes on 1 January 2021.
The above change will have a significant impact on the VAT recovery position of UK financial and insurance institutions as they will be able to recover VAT on relevant services provided to non-UK customers. Businesses should review their partial exemption position and consider how this will impact on the structuring of future arrangements.
Possible opportunities for businesses to take advantage:
- Businesses which only provide specified services to UK and/or EU customers may currently have no basis on which to register for VAT in the UK. As a result, input tax incurred on its costs represent an absolute cost to the business. From 1 January 2021, these businesses will be entitled to voluntarily register for VAT in the UK and recover the proportion of VAT they incur in the course of making supplies to EU customers;
- Companies who are currently VAT registered make specified supplies to EU customers will have to restrict input tax recovery on VAT incurred in the course of making supplies. Such businesses will now see an uplift of VAT on these costs. Businesses in this position may wish to consider whether the ‘standard’ method of apportioning VAT between taxable and exempt supplies based on turnover gives a fair and reasonable rate of VAT recovery. If not, they could look to whether an alternative method of apportionment could be agreed with HMRC to maximise the benefit to them;
- Businesses making supplies to UK, EU and non-EU customers may already have agreed a VAT recovery method with HMRC based on factors such as the volume of transactions, number of customers based outside the EU etc. If you are in this position, you should re-visit your current method and satisfy yourself that it continues to provide a ‘fair and reasonable’ method of apportionment post-Brexit. HMRC may also seek to review your method given the likelihood of increased recoveries and could seek to re-impose a standard method or re-negotiate a new agreed method if they don’t consider that the ‘fair and reasonable’ test is met.
Given that many businesses are currently struggling with the implications of Brexit from a wider Indirect Tax perspective – whether in terms of physical supply chains, B2C retailers or B2B suppliers of certain performance services – this announcement is a welcome positive announcement from the Chancellor. However, as above, whilst this should provide an uplift in VAT recovery, businesses still need to, firstly, be aware of the change, and secondly, take steps to consider how the change will impact them and what next steps need to be taken. As with all things Brexit, taking a proactive approach to the changes and how they affect your business is the first step to ensuring that after 1 January 2021, you are in the best operational, commercial and financial position possible.
Finally, whether this announcement will lead to such significant benefit for the financial services sector will to a large degree depend on whether the changes brought about by Brexit will result in a shift in the financial services landscape in the UK. For example, whether regulatory issues or any grandfathering provisions will mean that UK businesses in the sector are still able to trade with the EU or whether we will see significant moves from the UK to non-EU financial services hubs.
This article was written by Douglas Todd Indirect Tax Partner at Price Bailey, who can be contacted for any further assistance.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.