Navigating VAT in Financial Services: Top 4 issues and strategies

VAT is a complex and specialised area for Financial Service providers and failure to stay on top of this rapidly developing and digitising industry can result in significant VAT costs. Here we take a look at the current top 4 VAT issues that the industry is facing.

Scope of VAT exemptions

The recent Supreme Court judgement in Target Group Ltd v HMRC [2023] UKSC 35 has brought about a significant change in the VAT exemption for payment activities. The Court ruled that giving irrevocable instructions, such as a BACS upload, no longer qualifies for VAT exemption. This overturns the previous Court of Appeal decision in FDR and significantly narrows the exemption. It's important to note that HMRC has yet to issue revised guidance following the judgement. Therefore, businesses relying on this exemption are advised to review their position.

In addition, HMRC’s recent consultation on the VAT treatment of Fund Management, and soon to start a wider review of the Financial Services exemption, suggest that further changes to the boundaries of the Finance exemptions are on the horizon.

Intercompany recharges

Cross-border intercompany recharges pose significant VAT risks for businesses that are partially exempt from VAT. The recipient is required to self-account for VAT on receipt of the service, however without appropriate documentation and controls they can go unreported resulting in late payment interest and penalties.

The recent Tribunal judgment in JPMorgan Chase Bank NA v HMRC [2023] TC8957, highlighted the importance of having all recharges correctly documented. The Court held that the services received by the UK Bank were indivisible as the service agreements did not reflect the economic reality.

VAT Recovery

With irrecoverable VAT costs exceeding £4bn annually, VAT recovery remains a top priority for the financial services industry. It's essential to ensure that your VAT recovery methodology aligns with your business activities and is accurately applied. Additionally, configuring accounting systems correctly to identify and recover VAT is equally crucial. Take the time to review your VAT recovery method and make sure you're recovering the maximum amount possible.

E-invoicing

Governments worldwide are taking steps to combat VAT fraud by implementing e-invoicing. Unlike traditional paper-based invoices, e-invoices are stored and sent digitally using a structured data format. However, with no global standard for e-invoicing, each country is adopting different approaches. As a result, businesses operating internationally must keep up to date with this rapidly developing area and assess their specific needs and compliance requirements.

In the fast-paced world of financial services, staying ahead of VAT complexities is paramount. With significant changes on the horizon and VAT costs soaring, it's time to take action. Review your VAT position, ensure meticulous documentation for intercompany recharges, and optimise your VAT recovery methods. Stay informed and adaptable to navigate the evolving landscape successfully.