VAT in the City – a vital Brexit battleground

07 March 2017

07 March 2017 by Glyn Edwards Tax, VAT

A report in the House of Commons Library has highlighted VAT as the most likely tax area which will change post-Brexit. The report rightly points out that UK VAT policy has been largely fettered by the drive for harmonisation of VAT rules within the Single Market.

One particular area of controversy will be the VAT treatment of financial and insurance transactions with the health of the finance sector certain to be very high on the agenda during Brexit negotiations, given the relative importance of the City to UK’s national wealth.

The City already has favourable VAT status in respect of transactions with clients based outside of the EU. Under the heading ‘Specified Supplies’, finance and insurance businesses are able to recover input VAT to the extent that they deal with non-EU customers. This creates a significant benefit in terms of VAT recovery on overheads which the City would argue is essential to avoid unfair competition from VAT-free jurisdictions like the US.

No VAT recovery is allowed where costs relate to customers in other member states: those supplies are treated exactly the same as supplies to UK clients, that is VAT-exempt with no recovery of related input VAT.

So what will be the position after Brexit? There will be a number of competing arguments. The City will lobby for EU customers to be treated like any other overseas client with supplies being ‘specified’ and therefore significantly increasing rights of VAT recovery. The EU is almost sure to seek to block this on the grounds of unfair competition with the major European Finance Centres such as Frankfurt. The UK government will be torn: allowing greater rights of VAT recovery will boost the City, but will also result in a direct decline in VAT receipts.

As well as economic and competition issues, there will always be a political angle to any Brexit debate. If the EU successfully fends off an expansion of the ‘specified supplies’ relief then this will preserve an important principle of the Single Market and critics may argue that this would be a failure of the UK to make the most of a potential benefit of leaving the EU.

This is just one example of the complications which will arise in the negotiations ahead. It relates to one short regulation – the VAT (Input Tax)(Specified Supplies) Order 1999 and yet this alone could provoke months of argument, analysis and threats of retaliatory action if the EU perceive that the UK is seeking to gain a competitive advantage after leaving the Union.

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If you would like further information or advice on VAT please contact Glyn Edwards, your local MHA MacIntyre Hudson adviser or send an enquiry.

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