The UK Government has recently published several pieces of VAT legislation that will take effect if there is a no-deal Brexit. Financial services businesses should note one announcement; they will continue to suffer a restriction of VAT recovery on exempt supplies to UK and EU counterparties post-Brexit. As EU businesses serving UK customers will be entitled to recover local VAT related to UK business this legislation could create an unlevel playing field and lead UK businesses to transfer operations to the EU.
Many financial services benefit from an exemption for VAT purposes. This means that whilst VAT is not charged on the provision of services, financial organisations suffer a restriction on the amount of VAT that they can recover on operating costs incurred in respect of supplies made to EU based customers. By contrast, EU law also states that VAT may be recovered on costs of serving non-EU customers.
So, if a UK financial organisation engages with a business in say Frankfurt no VAT recovery will be allowed on costs associated with that supply; but if it engages with a company in Tokyo or New York then it can recover VAT on associated costs. This is designed to ensure that EU businesses can compete with non-EU financial institutions that do not have to suffer VAT on costs.
The UK Government has now confirmed that, post-Brexit, it will maintain the status quo whereby supplies made from the UK to an EU counterparty will continue to be exempt from VAT with no underlying VAT recovery. But how will the same transaction be treated if made by a Frankfurt-based business to a UK counterparty?
If the supply made by Frankfurt-based business to a UK counterparty is now to be treated in the same way as a transaction with a business in say Tokyo or New York, then this could enable the financial services provider to recover VAT which is currently restricted. Depending on the current level of trading with UK counterparties businesses based in the EU could benefit from a significant reduction in the level of irrecoverable VAT.