In an address to Parliament on 9 November 2020, the Chancellor confirmed that the government will
“…. make sure UK financial services exports to the EU remain competitive” and “will treat those exports the same as we do for other countries. This means UK firms will be able to reclaim input VAT on financial services exports to the EU…”
This is great news for insurers and insurance intermediaries as this will improve both cashflow and profitability.
Currently only financial and insurance services supplied outside the UK and EU are exempt from VAT with a right to recover input VAT. From 1 January 2021 we now expect this will be extended to include services supplied to EU customers.
Regulations were put in place to deal with the UK’s departure from the EU and these are expected to come into force once the transitional period ends on 31 December 2020. They provide that all specified supplies of services to customers who belong outside the UK will be entitled to exemption with refund. This right to VAT recovery will in future now apply to exempt insurance services made to persons who belong within the EU. The measure is estimated to be worth £800m to British firms.
Who are the likely beneficiaries of this change?
UK based insurance companies and intermediaries as well as any financial businesses providing services to EU customers will benefit from improved cash flow and profitability. Those companies with partial exemption methods will need to assess the change and whether the method will require revision. Other businesses such as group treasury operations may also be affected.
Businesses which have established operations in EU financial centres to comply with EU regulations will continue to be governed by EU VAT rules on the right to deduct the VAT incurred in those operations.
Businesses which are currently not registered for VAT as their supplies are all exempt may be entitled to register for the first time if some of their supplies are to customers in the EU which attract a right to VAT recovery.
What should I be doing to prepare for these changes?
Whilst we await formal confirmation of the change, businesses should plan for the effect of these changes now. Reviews should be undertaken of the VAT compliance and reporting process to support the monthly and quarterly partial exemption calculations and returns.
Furthermore, those businesses with partial exemption Special Methods should consider whether their method remains appropriate.
Businesses not registered for VAT with supplies to customers in the EU should consider VAT registration, if appropriate.
We expect further announcements to be made in the coming weeks. In the meantime if you have any questions please contact us.