UK firms will be able to reclaim VAT on financial services to EU

That’s according to Chancellor Rishi Sunak, who sought to provide clarity amid the uncertainty of Brexit negotiations. The news will be welcomed by financial services companies based in the UK.

Trade with the EU after Brexit

In theory, the outcome could be anticipated. According to current UK regulations, the supply of financial services to non-EU states is VAT exempt. Consequently, VAT on costs associated with those services can be reclaimed.

Following the end of the Brexit transition period, UK businesses would theoretically supply financial services to EU states on equivalent terms. 

However, negotiations are still ongoing. In practice, the ultimate terms of a final deal could in principle affect the provision of financial services by UK firms to the EU.

Seeking competitive equivalence 

In a bid to provide certainty, Sunak announced that “we will use equivalence when it is in the UK’s economic interests to do so … to make sure UK financial services exports to the EU remain competitive, we will treat those exports the same as we do for other countries.” 

That is, the UK government has undertaken to treat the provision of financial services to the EU on the same terms of exports to non-EU countries.   

Passport to uncertainty? 

As negotiations are still ongoing, the terms of trade between the UK and the EU are in flux. 

Several questions remain about the terms of trade in general, and financial services in particular. 

Prior to Brexit, UK financial services companies have been able to operate relatively freely in the EU single market through the provisions of the EU passporting system.

If UK financial services companies are no longer able to take advantage of passporting, they may be required to establish EU offices in order to supply services to EU markets. 

That could have significant VAT implications. Any UK companies that are anticipating providing financial services to European markets  from 1 January 2021 are therefore strongly advised to seek full clarity on potential scenarios.