If the UK leaves the EU in a no-deal scenario there may be a benefit for UK based suppliers of financial and insurance services (so called Specified Supplies) to recipients in the EU. These Specified Supplies attract beneficial input VAT treatment pursuant to the VAT (Input Tax) (Specified Supplies) Order 1999 (the Specified Services Order).
Current position
Currently, these Specified Supplies are exempt and consequently, there is no right to deduct input tax incurred in connection with such services. However, if the Specified Supplies are provided to recipients located outside the EU, they are also VAT free, although any attributable input tax is recoverable; a good VAT position.
Post Brexit position
If the UK leaves the EU, the VAT treatment of supplies to non-EU countries is also applicable to the EU 27 countries; the EU would essentially become a “third country”.
Example
A City of London based bank supplies financial services to both Germany and the US clients. Income from these two clients is 50:50. At the current time the bank would be restricted to a claim of circa half of the VAT it incurs on expenditure in the UK. After Brexit, via The Value Added Tax (Input Tax) (Specified Supplies) (EU Exit) (No. 2) Regulations 2019 all input tax incurred will be recoverable in full.
What are Specified Supplies?
Specified Supplies are broadly:
- the issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money.
- granting of credit
- dealing in; shares, stocks, bonds, notes (other than promissory notes), debentures, debenture stock
- the operation of any current, deposit or savings account.
- the management of certain investment funds/schemes
- insurance
- and intermediary services in respect of the above supplies
This list is not exhaustive and is only a very general example of types of supplies which may be considered as Specified Supplies. Please seek advice on specific services.
Other matters
The government says that this change will ensure that UK businesses compete for business in the EU on an even footing with businesses in other non-EU countries.
The proposed legislation also provides that partial exemption special methods (PESM) agreed before a no-deal Brexit will be honoured so businesses will not need to apply to HMRC for approval of a new PESM. Please see guide to partial exemption here
NB: If a deal is agreed between the UK and the EU, the above legislation will not be enacted, and the current VAT treatment will continue throughout the implementation period set out in a withdrawal agreement.