Potential for VAT reclaims in relation to Specified Supplies

The First Tier Tribunal decision in Hastings Insurance Services v HMRC addressed whether, for VAT purposes, a taxpayer could reclaim as input tax the VAT incurred on supplies of broking, underwriting support, and claims handling services. Following this decision, the UK government introduced new legislation. This legislation, known as The Value Added Tax (Input Tax) (Specified Supplies) (Amendment) Order 2018, amended article 3 of The Value Added Tax (Input Tax) (Specified Supplies) Order 1999 (SSO). The amendment was designed to restrict the application of the SSO in specific circumstances. Its purpose was to curb VAT avoidance.

That legislation was prompted by a VAT avoidance scheme that leveraged the VAT rules that allowed the recovery of VAT for exempt financial services supplied to non-EU recipients, by routing services primarily performed in the UK through an entity located outside the EU. The 2018 amendment was introduced to block those cross-border structures that enabled the recovery of VAT costs associated with exempt financial services.

Overview of the specified supplies order

The SSO, particularly in sections 3 and 4, outlines certain supplies for which VAT recovery under section 26(2)(c) of the VATA 1994 would be permitted by HMRC, even if they are exempt supplies. This means VAT incurred on expenditure related to these supplies can be treated as recoverable input VAT due to the Treasury Order.

The services that fall under the Specified Supplies Order include:

• Services:
  • (a) Supplied to a person who belongs outside the UK.
  • (b) Directly linked to the export of goods to a location outside the UK.
  • (c) Provision of intermediary services as defined under item 4 of Group 2, or item 5 of Group 5, of Schedule 9 to the VAT Act 1994, in relation to transactions specified in (a) or (b) above.

These supplies are exempt or would have been exempt if made in the UK, under Group 2 or items 1-6 and item 8 of Group 5, Schedule 9 of the VAT Act 1994.

• Investment Gold:
  • Supplies made either within or outside the UK that fall, or would fall, under item 1 or 2 of Group 15 of Schedule 9 of the VAT Act 1994 (investment Gold).

Impact on financial services clients

Taxpayers making the supply of financial services have a potential for their services to be considered as Specified Supplies, if those services fall under either Group 2 (Insurance) or items 1-6 and 8 of Group 5 (Finance) of Schedule 9 to the VAT Act 1994 and are provided to recipients whose place of establishment is outside the UK, or they are directly linked to the export of goods.

This includes intermediary services (item 5 of Group 5, Schedule 9 to the VAT Act 1994), which involve connecting parties for financial services or performing preparatory work for financial contracts.

The post-Brexit VAT recovery opportunity

Prior to Brexit, businesses providing Specified Supplies to clients whose place of establishment is outside the EU could reclaim VAT on costs directly linked to those services. Post-Brexit however, the definition of Specified Supplies has expanded to include transactions with counterparties outside the UK, rather than just outside the EU.

This extension broadened the potential for VAT recovery. UK businesses making Specified Supplies to recipients in both the EU and the Rest of the World can now reclaim the VAT incurred on related costs in full.

Why is this important?

We expect that businesses that make Specified Supplies, who are currently not VAT registered should, as a result of the change become entitled to register for VAT, and as a consequence, be able to reclaim some of the VAT they incur.

In addition, we anticipate that businesses that are currently VAT registered and partly exempt, should be able to benefit from an increase in their partial exemption VAT recovery rate. Therefore, we would recommend those businesses should review their current partial exemption methodology to ensure it remains the most suitable for them.

If not already done, we recommend that all UK based businesses review their VAT accounting to ensure they are recognising Specified Supplies, and where appropriate, they have made the requisite amendments to their VAT recovery methodology, to take advantage of this opportunity.

If you think you might be impacted by this change and would like to discuss any of the points mentioned above further, please get in touch with our VAT team.