HMRC has announced that new UK VAT rules are to be introduced later this year that will reduce the amount of VAT that finance and insurance intermediaries can reclaim. It is not yet known when the new rules will come into effect.
What do the rules apply to?
The rules apply to specific transactions where there are 'offshore loops'. This is explained further below but at a high-level it involves the UK intermediary billing an offshore (non-EU) principal in relation to a finance/insurance service where the ultimate customer is in the UK.
What is changing?
For many financial and insurance intermediaries the starting point is that the UK VAT they incur relating to these activities is already irrecoverable. However, where the counterparties to whom they provide their intermediary services are located outside of the EU, there are currently specific UK VAT rules allowing UK VAT to be reclaimed on expenses directly relating to this income. It is these rules that are to be amended.
The draft measures announced by HMRC will deny UK VAT recovery where:
- the financial/insurance intermediary provides their service to a counterparty outside of the EU
- that non-EU principal provides services to the end customer based in the UK.
Why are they changing?
The changes are a direct response to recent VAT case-law where HMRC considers that businesses have been engaging in VAT avoidance through the use of structures involving locations such as the Channel Islands and Gibraltar, which are treated as being outside of the EU for VAT purposes.
The changes reduce the scope of the current VAT relief for exporters of financial services by excluding financial intermediation in supplies made ultimately to UK customers. This will mean that the UK providers of these financial services will no longer be able to recover VAT when acting as an agent for a non-EU principal when the services are in fact being provided to an end customer in the UK. However, the new rules are intended to continue to allow UK VAT recovery where the end customer is located outside of the UK.
How we can help
For those businesses unsure of their obligations, it is important to seek specialist advice. Contact Crowe’s VAT team who can help you to understand if these rule changes will impact you and what the financial consequences will be.