Policy paper

VAT: Specified Supplies anti-avoidance amendment

Published 29 October 2018

Who is likely to be affected

This measure will affect those providers of intermediary services to the insurance sector who export their services outside of the EU.

General description of the measure

This measure amends article 3 of the Value Added Tax (Input Tax) (Specified Supplies) Order 1999 to restrict its application in certain circumstances in order to prevent avoidance.

The specified supplies order allows companies who export certain financial services from the European Union to reclaim the VAT they incur while providing those services. When these services are supplied inside the EU, this VAT cannot be reclaimed.

The specified supplies order is currently being exploited by companies that form arrangements with organisations outside of the EU to re-supply or ‘loop’ those services back to United Kingdom consumers, allowing themselves to reclaim the VAT and thereby gaining a competitive advantage over purely UK based companies.

This order seeks to prevent a particular form of this ‘looping’ involving insurance intermediaries by restricting the application of the specified supplies order to cases where the final consumer is not in the UK, as was intended.

Policy objective

This measure is intended to prevent offshore looping avoidance in the insurance sector by modifying the specified supplies order. This will help prevent an unfair competitive advantage for those who make use of these schemes and ensure that the VAT system functions fairly.

Background to the measure

This measure was announced through a Written Ministerial Statement on the 19 July 2018. The draft Statutory Instrument and Explanatory Memorandum were published for consultation from the 19 July 2018 until 28 September 2018.

In response to comments received from industry representatives on the draft legislation, the measure has been further refined to target it more tightly on the known avoidance.

It will now apply to insurance intermediary supplies only and VAT recovery will only be restricted when the principal supply is made to consumers located within the UK, rather than within the UK and the EU as originally drafted.

This Budget 2018 measure announces the outcome of the consultation on the draft legislation and the date of implementation of the changes.

Detailed proposal

Operative date

These changes are being made by negative Statutory Instrument. The laying date is December 2018. The implementation date will be 1 March 2019.

Current law

The current law is in the specified supplies order, which implements:

• the right of deduction of input tax required by Article 17(3)(c) of Council Directive 77/388/EEC
• the limited right of deduction required by Council Directive 98/80/EC, 12 October 1998

Proposed revisions

This Statutory Instrument will restrict the right of recovery of input VAT for insurance intermediaries to circumstances where the final consumer of the insurance service they are arranging does not belong in the UK.

This is achieved by amending the description of specified supplies in the Value Added Tax (Input Tax) (Specified Supplies) Order 1999.

At present, intermediary services (as described in item 4, group 2, schedule 9 Value Added Tax Act 1994) that are supplied to a person outside of the EU are specified, allowing recovery of input VAT no matter who the final consumer of those supplies is.

Intermediary services made in respect of a principal supply which is made to a customer belonging in the UK will no longer be specified, and therefore no longer have a right to recover input tax.

The implementation date of this measure will be 1 March 2019.

Summary of impacts

Exchequer impact (£m)

2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024
negligible	+65	+65	+75	+95	+100

These figures are set out in Table 2.1 of Budget 2018 as part of a package of measures called ‘Offshore: prevent profit fragmentation, extend VAT grouping rules, and prevent looping avoidance schemes’ and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2018.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

There is no impact on individuals and households as this measure only affects businesses. There is no impact on family formation, stability or breakdown.

Equalities impacts

It is not anticipated that this measure will impact on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure will impact on a small number of providers of intermediary services who export their services outside the EU.

These businesses, currently using the offshore looping avoidance arrangement, will no longer be able to reduce their VAT liabilities by routing supplies to UK customers through an offshore entity.

This will remove an advantage these businesses have over wholly UK based insurers and level the playing field.

The impact on businesses administrative burdens is expected to be negligible. One-off costs include familiarisation with the new rules. It is not expected that there will be any on-going costs. There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

There will be no operational impacts as a consequence of this measure.

Other impacts

Other impacts have been considered and none have been identified.

On 23 June 2016, the EU referendum took place and the people of the United Kingdom voted to leave the European Union. Until exit negotiations are concluded, the UK remains a full member of the European Union and all the rights and obligations of EU membership remain in force. During this period the government will continue to negotiate, implement and apply EU legislation. The outcome of these negotiations will determine what arrangements apply in relation to EU legislation in future once the UK has left the EU.

Monitoring and evaluation

The measure will be monitored through information collected from tax returns, receipts and routine compliance checks.

Further advice

If you have any questions about this change, contact Barbara Farndell on telephone: 03000 585 917 or email: barbara.farndell@hmrc.gsi.gov.uk.