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.

Background

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.

Practical implications

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.  

Author

Mark Agnew is an experienced VAT practitioner and leads Baker McKenzie's financial services tax practice in London. Mark advises a large number of clients across the financial services industry, with a particular emphasis on banks and payments businesses, with a deep specialism in card and electronic payments. Mark works with the wider financial services tax practice in addition to Baker McKenzie's financial regulatory and reorganisations teams to advise on structuring and restructurings for financial services groups, particularly in the context of Brexit. In addition, Mark advises clients with tax authority disputes where he helps to reach settlements or to litigate where necessary, in addition to advising on the tax treatment of new products and markets, and also M&A and real estate transactions. Mark is a member of the Firm's EMEA VAT Steering Committee and works closely with the EMEA and global VAT practice.

Author

Naima advises clients on a broad range of complex indirect tax law issues, with a particular focus on VAT planning and corporate restructuring. She is a Chartered Tax Adviser, having qualified under the indirect tax route.

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