The Chancellor has confirmed that financial services (FS) businesses which trade with EU counterparties will be able to recover associated input VAT from 1 January 2021. This is the same as currently occurs with FS businesses who supply non-EU counterparties.
This is a turnaround from the previous guidance provided by HMRC. It offers welcome relief to the UK’s FS businesses, which should benefit from increased VAT recoveries.
Many FS businesses such as brokers, traders, corporate finance and insurance businesses are generally unable to recover VAT incurred. There has always been an exception to this rule: supplies made by FS businesses to counterparties located outside the EU. Trades with non-EU counterparties allow your business the right to recover input VAT, even though no output VAT is chargeable. A business making such supplies is able to voluntarily register for VAT and in many cases this can result in VAT repayments from HMRC.
The good news is that this VAT repayment will be extended to cover supplies made to EU-based counterparties from the start of 2021. For example, a broker whose clients are located in the EU or who trades on EU-based exchanges will now enjoy enhanced VAT recovery.
For some businesses, it was previously not worth VAT registering, because VAT repayments would have been so low. This change to the rules means that voluntarily registering for VAT may become worthwhile, in order to obtain VAT repayments.
FS supplies to UK counterparties will remain exempt with no right to recover VAT. This will still result in you recovering only a proportion of your input VAT, by means of a partial exemption method.
We recommend reviewing any partial exemption special methods you have agreed with HMRC to ensure they are still ‘fit for purpose’ and reviewing the way you calculate VAT recovery to ensure it can cope with the change to the VAT rules. Our FS and VAT specialists would be pleased to help with this.
If you would like to discuss the VAT implications of the new rules for your business, please get in touch with your usual BKL contact or use our enquiry form.
VAT and preparing for Brexit will be one of the topics in our tax webinar on Wednesday 18 November. Find out more and register free here.