Did you know businesses operating in the financial or insurance sector can, under some circumstances, recover some of the input VAT they incur on costs if they make overseas supplies?
Businesses within the financial and insurance services sector are likely to be subject to the VAT exemption rules when making certain supplies for UK clients. For example, fees for arranging any corporate finance transactions will be exempt as they are typically intermediary services for arranging a transaction in securities. The VAT treatment of the intermediary service mirrors the VAT treatment of that transaction being arranged.
What supplies are subject to exemption?
The default position within UK VAT is that any transaction is subject to standard-rated VAT (20%) unless an exception applies and thus changes it to reduced rate, zero-rate or exempt.
If the business operates within the financial sector and makes supplies that are:
“The making or any advance or the granting of any credit and the issue, transfer or receipt of, or any dealing with, any security including shares, stocks bonds, notes etc.”
or intermediary in nature it may treat such supplies as exempt from VAT. HMRC define intermediary services as services consisting of bringing together, with a view to the provision of financial services:
(i) Persons who are or may be seeking to receive financial services; and
(ii) Persons who provide financial services
The party must also be acting in the following capacity:
(i) As an intermediary in relation to an exempt financial transaction
(ii) Providing a service in relation to the exempt financial services transaction
(iii) Undertaking work that is preparatory to the conclusion of a contract for the provision of financial services.
If the business operates within the insurance sector and makes supplies of any of the following services to UK customers, it is likely that the VAT exemption should apply to the business:
(i) preparing/issuing contracts of insurance or reinsurance;
(ii) providing assistance with claims handling; and
(iii) collecting insurance premiums
From exempt to a taxable supply – The Specified Supplies Order
Note that with the above, we are referring to supplies being made for UK customers, but what if the above supplies are made to customers outside the UK?
The Specified Supplies Order provides an important exception to the VAT exemption rule in cases where financial and insurance services are supplied to overseas clients. It provides the ability to recover input VAT on costs associated with supplies of financial services and insurance in a situation where such supplies are made to businesses outside the UK. Sometimes referred to as “exported services”, such supplies are treated and known as “Exempt with the right to recover”.
One advantage of Brexit was to redefine supplies of services made to the EU from “EU services” to “exported” services.
Consequently, such EU services previously subject to the VAT exemption within the finance and insurance sectors changed to “exempt with the right to recover”, thus providing an ability to recover a larger proportion of the VAT costs.
An important point to remember is that if your business is partially exempt, you must carry out an annual adjustment at the end of the VAT year. Annual adjustments are mandatory and must be carried out by all partially exempt businesses.
Unfortunately this is a part of the process that many businesses forget to carry out, or complete incorrectly which can lead to an erroneous VAT submission, along with the potential to be penalised by HMRC, so it is important to check it is done correctly along with the proper application of the annual adjustment for each of the last four years (because HMRC can go back and penalise businesses for the last four years).
So, in summary, where a business operates within the financial or insurance sector, and makes supplies to overseas clients of certain services that fall within the Specified Supplies Order, it will have the ability to recover a certain amount of the input VAT it incurs.
For more information, or assistance on VAT exemption/partial exemption on financial and insurance services please speak to Darren Ambler, or your usual Menzies contact if applicable.