On 9 November 2020, the Chancellor confirmed that with effect from 1 January 2021 the VAT rules governing the supply of financial services to customers in the EU27 would be brought into line with the supply of these services to customers in non-EU countries. The result is that providers of such services will be able to recover VAT on attributable costs. This change could represent a major boost to financial service providers and their brokers which incur significant costs, whether running costs or capital investment. For example, fintech businesses with significant technological costs will benefit greatly.
Background and changes
The current pre-Brexit position is that VAT cannot be recovered on costs which are attributable to financial services or insurance services (Groups 2 & 5, Schedule 9, VAT Act 1994) supplied to customers within the VAT jurisdiction, which is currently the entire EU. This VAT therefore becomes a cost to the business. Recovery is however permitted of VAT on costs attributable to the same supplies where the customer is located outside the VAT jurisdiction (ie outside the EU).
From 1 January 2021, the UK will leave the EU. Our VAT jurisdiction is expected to become just the UK. The question asked by the financial and insurance industry is whether all their supplies to customers outside the new, smaller jurisdiction (ie outside the UK) would be treated the same way as supplies made outside the EU, entitling suppliers to EU27 customers to recover VAT on some or all of their costs.
Initially, the government had published the Value Added Tax (Input Tax) (Specified Supplies) (EU Exit) (No. 2) Regulations 2019, which looked to extend the current position in the event of a no deal Brexit, preventing the recovery of VAT where financial services were supplied to customers in the EU27.
The recent announcement by the Chancellor reverses this draft legislation for financial services, enabling VAT recovery, and it is thought that this will also include insurance services and related brokerage/intermediary services. For example, Value Added Tax (Input Tax) (Specified Supplies) Order 1999 (SI 1999/3121) refers equally to a supply of financial or insurance intermediary services and it would be a surprise if either insurance services or broker/intermediary services were unable to benefit from the chancellor’s stated policy.
This policy will be a positive step for not only the established suppliers in the industry but also start-ups looking to establish themselves in the market. The positive impact will be felt where supplies are made to customers in the EU27, but the implications and opportunities still need to be worked through and implemented.
Businesses which make supplies to EU27 customers, or who broker deals involving EU27 parties, should consider how to capture this information and how to attribute and apportion costs for a more complete recovery of the VAT paid. This change will also affect the budgeting of future projects, particularly where there is significant initial investment. The use of VAT groups in planning should also be reconsidered, as should current spending patterns.