Transitional guidance for VAT specified supplies
Find out about the transitional guidance on VAT treatment of transactions of specified supplies of finance and insurance services.
Overview
This information sheet provides further guidance on the VAT treatment of specified supplies following the changes made to the Value Added Tax (Input Tax) (Specified Supplies) Order (SSO) 1999 which came into effect at 11pm on 31 December 2020.
Value Added Tax EU Exit Transitional Provisions guidance on these changes (initially published on 23 December 2020) will be updated as soon as possible.
Types of businesses affected
Businesses supplying:
- certain financial services from the UK to persons belonging in the EU
- services in connection with an export of goods to persons belonging in the EU
This include banks, investment managers, insurers and brokers.
General description of the change and background information
Financial services (including insurance) are generally exempt from VAT which means that no VAT is charged by businesses supplying financial services and VAT on the costs relating to those supplies cannot be deducted as input tax.
The SSO allows businesses who export certain financial services, known as specified supplies, to deduct input tax on costs associated with making those supplies.
Prior to the end of the EU transitional period, the SSO only provided a right to deduct input tax in relation to specified supplies made to customers belonging outside the EU. With effect from 11pm 31 December 2020, the SSO was extended to include specified supplies made to customers belonging in the EU.
The SSO now provides a right to deduct input tax for specified supplies made to EU customers as well as those belonging outside the EU. These changes are included in SI 2020/1545 at regulations 91 and 92.
VAT treatment of specified supplies that span 11pm 31 December 2020
Directly attributable input tax incurred before 11pm 31 December 2020
Input tax you incur before 11pm 31 December 2020 that is used exclusively to make an exempt financial supply to a person belonging in the EU before 11pm 31 December 2020, is directly attributable to an exempt supply and carries no right to recovery.
Re-attribution of input tax incurred before 11pm 31 December 2020 as part of the longer period adjustment ending after 11pm 31 December 2020
If you are partially exempt and are using the standard method or a HMRC approved special method which provides for an annual adjustment, then the input tax that you claim in each tax period is provisional and is reviewed in your longer period adjustment.
(i) Re-attribution to a taxable supply
For partial exemption purposes financial services that fall within the SSO are treated as taxable supplies. Input tax that you have originally directly attributed to an exempt financial supply to the EU can be re-attributed to a taxable supply as part of your longer period adjustment provided all of the following conditions are met:
- the input tax has not been used to make an exempt supply prior to 11pm 31 December 2020
- the supply which it will be used to make is a specified supply made after 11pm 31 December 2020
- longer period adjustment relates to a tax year ending after 11pm 31 December 2020
(ii) Re-attribution to residual
Input tax that you have originally directly attributed to an exempt financial supply to the EU can be re-attributed to residual as part of the longer period adjustment relating to a tax year ending after 11pm 31 December 2020 provided one of the following conditions are met.
The input tax:
- has not been used to make exempt supplies prior to 11:00pm 31 December 2020 and is used, or intended to be used, to make both exempt and specified supplies after 11:00pm 31 December 2020
- is used in part to make exempt supplies prior to 11pm 31 December 2020 and also used or intended to be used in part to make specified supplies or both exempt and specified supplies after 11pm 31 December 2020
Longer period adjustment for tax years ending before 11pm 31 December 2020
Input tax that you have directly attributed to an exempt financial supply to the EU cannot be re-attributed to a future taxable specified supply or residual where your tax year ends before 11pm 31 December 2020. This is because at the end of the tax year to which the longer period adjustment relates, financial supplies to the EU carried no right to deduct. Effectively the longer period adjustment secures the attribution.
Directly attributable input tax incurred after 11pm 31 December 2020
Input tax you incur after 11pm 31 December 2020 that is used exclusively to make a specified supply to a customer belonging in the EU after 11pm 31 December 2020, is directly attributable to a taxable supply and carries a right to recovery.
If you incur input tax after 11pm 31 December 2020 that is a cost component of an exempt financial supply to a customer in the EU made prior to 11pm 31 December 2020, the input tax is directly attributable to an exempt supply and carries no right to recovery. An example of this, is where an insurer incurs input tax on legal fees for an insurance claim after 11pm 31 December 2020 that relates to a supply of insurance made before 11pm 31 December 2020.
Residual input tax
Residual input tax should be calculated according to your partial exemption special method taking into account the changes made to regulation 102(2A) of the VAT Regulations 1995, read partial exemption special methods (PESM) for more information.
Partial Exemption Special Methods (PESM)
A change has been made to regulation 102(2A) of the VAT Regulations 1995 so that the wording of any previously approved PESM will be interpreted in accordance with the revised SSO. This will avoid businesses needing to apply for a new PESM, as the new treatment to allow VAT recovery on costs associated with specified supplies to the EU will automatically be read into existing PESMs.
An amendment has also been made to the partial exemption use-based calculation in regulation 103B(3)(a) so that the use-based calculation will allow for recovery on incidental specified supplies to the EU.
Provisional recovery rate
Some businesses have an approved PESM which requires them to deduct input tax provisionally in each VAT period using the previous year’s recovery rate which is then finalised using the actual year’s figures by way of the longer period adjustment. A business will normally request that their PESM operates using a provisional recovery rate as a form of simplification where performing the full calculation for each VAT period would prove difficult.
If a business wishes to amend their PESM so that they no longer use a provisional recovery rate or they wish to use the previous year’s recovery rate which takes into account the changes made to the SSO, this would require a change to their PESM and a new PESM would need to be approved by HMRC.
Where the changes to the SSO result in a business provisionally having a lower recovery rate because their PESM requires them to use their previous years recovery rate but the longer period adjustment corrects this position so that there is no loss of input tax, the PESM would be considered to be fair and reasonable and a new PESM would not be appropriate.
A business on the standard method that uses the previous year’s recovery rate to determine their recoverable residual input tax in each tax period may, at the beginning of their next tax year, choose to calculate their recoverable input tax by calculating separate recovery percentages for each VAT period so long as they apply this method consistently for the whole tax year.
Specific issues - tax point for insurance premiums
It is recognised that insurers may have difficulties identifying the premium received date for tax point purposes under Section 6 VATA 94.
Insurers may therefore use their current VAT accounting approach to determine their tax point in relation to insurance premiums on the basis that this is:
- consistent with their accounting basis
- aligned with the expenses incurred on which VAT is being recovered in the relevant period
More information
More information on the SSO and partial exemption can found in HMRC partial exemption VAT manual.