The UK’s financial services businesses have been handed a boost following a recent speech from Chancellor Rishi Sunak. He has announced that from 1 January 2021, it should be possible for UK businesses to recover VAT incurred on costs that relate to specific supplies of financial and insurance services delivered to EU customers. This should result in higher amounts of VAT recovery and hence a decrease in costs for impacted businesses.
As it stands, the default position for supplies of most financial and insurance services is that they are exempt for VAT purposes. This means that VAT is not due on the income received but also that VAT on associated costs cannot be recovered.
Currently, when such services are supplied to customers outside of the EU, they are referred to as ‘specified supplies’. VAT incurred on costs attributable to these supplies can be recovered. As a result, it is necessary to have a partial exemption method to calculate the amount of VAT which can be reclaimed considering the specified supplies made (where VAT can be reclaimed), the same supplies to customers in the UK and EU (where VAT cannot be reclaimed) and any other supplies the business makes.
Once the Brexit transitional period comes to an end, the definition of specified supplies is expected to be extended to include transactions with counterparties outside of the UK (and not just outside the EU per the current position). The legislation to do this is contained within the Value Added Tax (Input Tax) (Specified Supplies) (EU Exit) (No2) Regulations 2019 which, following the Chancellor’s speech, we understand will be enacted with effect from 1 January 2021. This is on the basis that it was confirmed that financial exports to EU customers will be treated in the same way as supplies to other third countries.
The benefits felt from this change will, to a degree, depend upon the final outcome of the UK-EU trade talks. This is because the extent to which UK firms can supply EU customers is still to be determined (i.e. will passporting be allowed or instead, will EU entities and offices be required in order for those markets to continue being serviced).
In the meantime, businesses should review their partial exemption methods to ensure they can capture the additional VAT recovery position that should flow from this change.
If you think you might be impacted by this change and would like to discuss further, please contact Robert Marchant, Rob Janering or your usual Crowe contact.