Specified supplies to EU customers post-Brexit

The Chancellor has announced that the existing rules on recovery of input VAT on financial services exported outside the EU will be extended to exports of financial services to customers in the remaining EU Member States following the end of the transition period. The announcement represents an important confirmation of Government policy and will be welcomed by the financial services industry which will be able to benefit from significant amounts of additional input VAT recovery in relation to such supplies.

Background

Under the existing VAT rules, which continue during the transition period, a business providing certain specified supplies of services (such as insurance and financial services) to a person outside the EU is entitled to input VAT recovery on the costs associated with those supplies. These "specified supplies" attract beneficial input VAT treatment pursuant to the VAT (Input Tax) (Specified Supplies) Order 1999 (the Specified Services Order).

One of the main consequence of Brexit is that the EU will (from a UK perspective) essentially become a "third country" and accordingly the rules for the place of supply of services will generally apply as if supplies of services to an EU customer are to a third country customer. In principle, therefore, the scope of VAT recovery under the Specified Services Order would be greatly expanded, covering exempt supplies of insurance and other financial services to EU customers as well as existing third country customers.

However, as part of its 2019 no-deal Brexit planning, the Government initially decided to restrict the scope of the post-Brexit specified supplies rules to supplies made to persons outside the EU as a result of concerns over the cost to the Exchequer of extending the beneficial treatment to EU supplies (VAT (Input Tax) (Specified Supplies) (EU Exit) Regulations (SI 2019/175)). This decision was later reversed by VAT (Input Tax) (Specified Supplies) (EU Exit) (No 2) Regulations (SI 2019/408), which provided that specified supplies of exempt financial services made to EU customers would fall within the scope of the Specified Supplies Order following a no-deal Brexit. However, as a result of the Withdrawal Agreement with the EU, this SI was never brought into force and it remained unclear what approach the Government would take to the extension of the specified supply rules to the EU following the end of the transition period.

Chancellor's announcement

The Chancellor has now made it clear in his recent speech to Parliament on the future of financial services that the ability to recover input VAT on costs associated with supplies of financial services and insurance will be extended to the situation where such supplies are exported to EU customers. As a result, HMRC has included provisions within the Value Added Tax (Miscellaneous Amendments, Northern Ireland Protocol and Savings and Transitional Provisions) (EU Exit) Regulations 2020 (SI 2020/1545) to give effect to these new rules.

Under the current rules, input VAT on supplies of such services to EU customers is not deductible, whereas input VAT on such services supplied into non-EU customers is deductible. Clearly it is sensible to treat supplies to EU customers in the same way as supplies to non-EU customers post-Brexit and the decision is therefore extremely welcome.

Businesses providing cross-border supplies of financial services covered by the Specified Supplies Order will benefit significantly both from the certainty that this announcement brings and their ability to recover input VAT on affected supplies of financial services.