Five top tips for managing VAT for Financial Services businesses

This article is for any FS business navigating the complexities of VAT – perhaps you are a start-up and you are looking to get the VAT right head-on; or you are an established business reviewing your VAT profile to ensure it remains fit for purpose. Here are our top 5 areas to look into from a VAT perspective.

1. Exemptions

As a starting point, you should check the extent to which your services are VAT exempt. This will dictate whether you have to charge VAT and whether you can recover VAT on associated costs. Exemptions are interpreted narrowly and the rules are complex and sometimes, unclear. As examples, lending is usually VAT exempt – however, managing a loan portfolio is not (although the way such activity is structured can affect this). Fund management services could be taxable or exempt depending on the types of funds being managed (and how these funds have changed over time); private wealth management services could also be exempt but that depends on the exact work being performed and the fee structures. There are many factors that influence the VAT liability including the nature of the supply, the economic reality, the contractual position and the scope of the exemption.

2. Extent of input tax recovery

Most FS businesses are not able to recover all of the VAT on their costs. However, there are still things that you can do to check if the recovery levels are optimal. This includes identifying whether any costs are used wholly for making taxable supplies as you can normally recover all of the VAT on such costs (the reverse is also true). It is worth checking if you agreed a special method to recover VAT from HMRC and whether the method needs a refresh to ensure it remains fit for purpose. Special methods are commonly used by FS businesses to achieve a fair and reasonable level of input tax recovery.

It is also worth checking if you have coded your transactions to UK and non-UK customers – in most cases, non-UK transactions give better right to recovery and don’t forget – places such as Gibraltar, Jersey and Guernsey are non-UK for VAT purposes. There is also a rule, often overlooked, that unlocks VAT recovery for certain exempt UK transactions too – it requires determining the place of your customer’s customer.

3. Reverse charge

The reverse charge rule requires you to charge yourself VAT when buying certain services from outside the UK. You can also recover this VAT as input tax to the extent you use these supplies for making taxable services. It is worth checking if the rules are being implemented properly. As an example, if you have applied the reverse charge on the purchase of exempt services, you may have over-accounted for VAT. Alternatively, if you are paying for certain overseas costs which are shared across the rest of the group, it is worth checking if the reverse charge is being applied on the right amounts at the right time.

4. VAT Grouping

For FS businesses, this is a high focus area for HMRC and so this should be on your list too. This includes checking whether your members are eligible to be in the VAT Group. HMRC are particularly focussing on whether the members have a UK establishment – if the member does not have enough substance and independent activity in the UK, this raises doubt over whether the entity should be in the VAT Group.

For businesses with overseas branches/head office, the rules on when VAT applies for transactions between overseas offices and UK offices/other VAT Group members are becoming incredibly complex. In particular, businesses need to consider certain anti-avoidance rules for services bought-in by overseas branches/head offices which are later supplied to other VAT Group members. Further, following the cases of Skandia/Danske Bank, in certain situations and depending on how an EU member state applies the VAT Group rules, businesses will also need to consider whether intra-entity transactions between an EU head office/branch and its local UK establishment are taxable.

The VAT rules for transactions between entities before joining or after leaving a VAT Grouping have also come into the spotlight and so it is worth paying close attention.

5. Systems and processes

You should also consider whether your systems and processes are allowing you to implement the VAT rules properly and whether these are giving effective results. As an example, a review of the Accounts Payable process could result in improving cash-flows for VAT being recovered on supplier’s invoices or a review of processes used for paying staff expenses could bring to light whether input VAT on staff costs is being recovered properly. Another area to consider is whether the systems could be automated to help produce VAT returns in a faster, simpler and reliable manner. Some businesses may already be considering this as an extension of complying with the rules for Making Tax Digital.

The interaction of these 5 areas can mean that, in practice, the list of VAT issues that can arise for FS businesses can be daunting. If you would like to discuss any of these areas in further detail or would like to have a wider conversation, please get in touch with Aditi Hyett or Sophie Bateman.