In this video, Dougie explores:
You can view earlier videos in the series below:
For further advice, please contact Dougie directly.
Within this video, Dougie clarifies:
You can view the additional videos in this four-part series below:
For further advice and assistance with your VAT obligations, contact Dougie Todd.
Fund management services in the UK are generally exempt from VAT. This exemption aligns with the broader treatment of financial services under VAT regulations. However, the exemption is dependent on satisfying specific conditions, highlighting the intricacies of VAT legislation in the financial sector. If the conditions for exemption are not met, then the supplies are subject to UK VAT.
For VAT purposes, fund management is the management fee charged by fund managers, which can be deducted from the fund’s assets or charged directly to investors. Importantly, the scope of what constitutes management can also extend beyond asset management. It also includes general administrative services and delegated third-party services, provided these services collectively embody the characteristics of fund management.
The nature of the fund under management is a key criterion in applying the VAT exemption. The exemption applies to nine different types of funds. In essence, fund management services are exempt if you:
It is therefore important that fund managers fully understand the nature of funds under management and how those funds are defined within UK VAT law, to determine whether its supplies are VAT exempt.
Fund management services are excluded from the list of specified supplies, which means managers making VAT exempt supplies to non-UK funds are not entitled to any VAT recovery on costs which are attributable to those supplies.
In 2023, HMRC launched a consultation aimed at simplifying the definition of qualifying funds for VAT exemption purposes. In December 2023, HMRC published its response to the consultation. The response failed to address a number of points that respondents to the consultation had raised, and which could have significantly clarified the VAT legislation as it applies to UK fund managers. Instead, the only change to the position of fund managers is that from 1 January 2024, UK fund managers will no longer be able to rely on the EU VAT law applying to their services. This is significant as the EU law has traditionally been drawn more widely that the UK legislation and may limit the ability of UK fund managers to rely on VAT exemption for their services.
Given the complexities involved in identifying eligible exemptions, fund managers are encouraged to seek professional VAT advice. As the sector anticipates regulatory, strategic VAT compliance and planning is becoming increasingly vital. Fund managers are advised to stay informed about legislative developments and seek expert guidance to ensure compliance and optimise their VAT position.
For further advice on any of the above, contact Dougie Todd, Partner and Co-Head of VAT.
Watch the video to understand:
You can view the additional videos in this four-part series below:
You can also read further detail here. For further advice and assistance with your VAT obligations, contact Dougie Todd.
This article aims to explain the principles and practices surrounding VAT on international supplies within the financial services sector, providing valuable insights for businesses aiming to navigate these waters effectively.
The VAT implications of international transactions hinge on the place of supply rules. These rules determine whether a supply is made in the UK or outside of it and, consequently, whether UK VAT is chargeable. Generally, the place of supply for financial services to non-UK customers is where the recipient belongs, making most of these services outside the scope of UK VAT. This can have significant implications for VAT recovery on costs.
Financial services businesses are largely exempt from VAT (our previous article here talks more about VAT exemptions). If the businesses’ customers are outside of the UK, generally, the supply of services continues to be VAT exempt. The absence of VAT can make UK-based FS firms more attractive to foreign customers.
However, the VAT exemption for services provided to non-UK customers also means that related input VAT on costs incurred in providing these services may not be recoverable. This aspect underscores the importance of understanding the specific rules that apply to the financial services sector and how they impact VAT recovery strategies.
As per UK VAT legislation, specified supplies (referring to a defined set of services and intangible goods) exported to non-UK customers are still considered VAT exempt and any input tax incurred which is directly attributable to those supplies can be recovered in full.
In essence, specified supplies are subject to special VAT treatment when supplied between businesses across borders. This special treatment is designed to simplify VAT accounting for businesses operating internationally and to ensure that UK suppliers of financial services are not disadvantaged from a VAT perspective.
In most cases, when UK businesses receive services from non-UK suppliers, the supplier will not charge UK VAT. However, in order to account for VAT, the reverse charge mechanism is applied. This shifts the responsibility for VAT reporting from the supplier to the recipient of the service.
Under the reverse charge, the supplier does not charge VAT on their invoice for the service supplied. Instead, the recipient of the service in the UK must account for VAT as if they had made the supply themselves, by paying 20% of the value of that cost to HMRC. This involves reporting the VAT on their VAT return, both as output tax (as if they had supplied the service) and as input tax (reflecting the VAT on the purchase), subject to the normal rules of VAT recovery.
The business must then consider whether any or all that VAT is recoverable as input tax using the normal partial exemption rules. As UK financial services businesses often suffer an irrecoverable VAT cost, this reverse charge mechanism can mean that these businesses cannot recover all or some of the VAT paid to HMRC
This mechanism prevents the need for suppliers to register for VAT in every EU member state where they have customers, simplifying international trade within the VAT area. It also ensures that VAT is accounted for in the Member State where the recipient is based, aligning with the principle that VAT should be charged in the location where services are consumed.
The final, important point is that the value of these ‘reverse charge’ services needs to be included in the VAT registration threshold calculation for the UK recipient. So, if a financial services business, which isn’t otherwise required to be registered (as it makes VAT exempt supplies which are not included in the turnover calculation), receives non-UK services, the value of which is over the registration threshold, the business is required to register for UK VAT and pay VAT to HMRC.
The key things to takeaway are:
Given the complexity and potential impact of specified supplies on VAT liabilities and cash flow, businesses engaged in international trade of services should seek professional advice to navigate these rules effectively. Proper management and compliance can help avoid costly mistakes and penalties while ensuring smooth international transactions.
Contact Dougie Todd, Partner and Co-Head of VAT, for further advice.
