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Written by: David Wilson

David Wilson

Technical Associate Director

Brexit VAT recovery for financial services providers; but is there sufficient scrutiny of Brexit legislation?

Changes to UK VAT legislation (in SI 2019/408) will mean that, in the event of the UK leaving the EU without a deal, financial services providers will, after all, be afforded VAT recovery on supplies of certain financial services made to the EU. 

The new legislation will only come into force in the event the UK leaves the EU without a negotiated arrangement; if a deal can be agreed, the legislation will not be enacted, and the current VAT treatment will continue throughout the agreed implementation period set out in the withdrawal agreement.

Under EU VAT rules, 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.

It was however, only a matter of weeks ago that legislation in the form of SI 2019/175 was passed in the UK preserving this EU/non-EU split. This legislation had stated that, in the event of a ‘no-deal’ Brexit, UK financial services providers would only be allowed VAT recovery on costs incurred in supplying financial services to a place outside both the UK and the EU. 

There is no explanation as to why this earlier legislation has been replaced so quickly, merely a statement in the accompanying memorandum that SI 2019/408 is an ‘alternative’ to the legislation introduced in SI 2019/175.

It could be the case that, in recognising the UK will be a ‘third country’ after Brexit, the Government has belatedly identified that EU financial services providers may have had a competitive advantage in being afforded a better VAT recovery than their UK counterparts would on their supplies to the EU 27.

It is however noticeable that both statutory instruments were laid under the ‘negative procedure’ rules, meaning that they become law on the day the Minister signs them. It is therefore also plausible that, in recognising the February instrument was flawed, a motion to reject was raised within 40 days of its issue. If that is indeed the case, a cause of concern is that this may be indicative that there is insufficient Parliamentary scrutiny of statutory instruments being laid in preparation of the UK’s exit from the EU.

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