The Chancellor has confirmed in a statement to the UK parliament on 9 November 2020, that from 1 January 2021, UK businesses which supply certain financial and insurance services (specified supplies) to customers located in the EU will be able to recover VAT on associated costs. This brings the VAT treatment in line with the existing rules for supplies to non-EU customers and could represent a significant VAT saving for UK financial service providers.
Under the current scope of the Value Added Tax (Input Tax) (Specified Supplies) Order 1999 (SI 1999/3121), a UK supplier can recover input tax related to supplies of insurance and financial services made to customers outside the EU. Under the existing rules, this VAT treatment does not apply to supplies made to UK or EU customers, meaning VAT is a cost on the inputs used for making those supplies.
The government previously published the Value Added Tax (Input Tax) (Specified Supplies) (EU Exit) (No. 2) Regulations 2019 which suggested that the intention of the legislature was to extend the specified supplies treatment to encompass supplies made to EU customers in case of a no deal Brexit. However, this SI did not come into force and until now it remained unclear whether the UK would move forward with this change on 1 January 2021.
The confirmation from the Chancellor that following the end of the transition period financial supplies provided to EU customers will now be treated in the same way as supplies to other third countries is therefore welcome in clarifying the position as we head closer towards the New Year.
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 structuring of future arrangements.
The full extent to which this change will be felt across the financial services industry will, to an extent, depend on agreement being reached on other issues, such as regulatory matters given this may limit any financial activity in the UK and force businesses to move EU business activities to hubs outside the UK.