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UK commits to VAT reform for financial services

2023 budget restates aim to review VAT treatment of banking, fintech and insurance

In yesterday’s annual Budget, the UK Chancellor confirmed ongoing work to review the current VAT exemption for financial services.

In addition to Value Added Tax, this will cover Insurance Premium Taxes which the UK is now free to incorporate into VAT. There are 2 rates of IPT: a standard rate of 12% and a higher rate of 20% on travel insurance, electrical appliance insurance and some vehicle insurance.

This includes consultation with an Industry Working Group to consider possible reforms to simplify the VAT treatment of banking, fin tech and insurance, with the aim of reducing inconsistencies and providing businesses with great clarity and certainly.

Potentially, this could include the imposition of VAT on financial services. However, the risks of cascading tax effect and current inflation spike cast doubt on this being done soon for fear of the entire tax bill being passed to consumers on basic loan products.

Prior to Brexit, the UK and Ireland could not reach agreement on the treatment of outsourced and commodity services with Germany and other member states. This stalled EU reforms back in 2011. With the UK out of the EU, member states have now resumed reform proposals.

Fintech VAT partial exemption issues

With the emergency of the thriving UK fintech sector, this issue brings added urgency, as identified by the Chancellor. Most Fintech businesses have hybrid business models – providing a mixture of exempt and fully rated VAT services.  Exempt activities include: transactional fees, withdrawal charges and foreign currency dealings. But fully taxable services include activities around cryptocurrency markets, annual membership to platforms and technical support. Payment services are amongst the most uncertain areas since it should be exempt from VAT, but payment app’s could be considered liable to VAT. Similarly, the definitions of crowdfunding activities can make the liability to VAT unclear.

In these circumstances, there are existing complex alternatives to allocate input VAT and potentially claim so it back.  Many businesses in this sector claim this is too bureaucratic and complex, and miss out on tax refunds they are fully entitled to.

EU pushes ahead with banking, fin tech and insurance VAT reforms

The EU financial services VAT review is due this year. However, the ongoing inflation spike means that little will be put forward on removing the VAT exemption in the short term.

The EC has already proposed five different VAT models for financial services, all of the including fresh legislative definitions based on recent European Court of Justice rulings:

  1. Standard rate with option for fixed rate reductions
  2. Reduced rate with option for fixed rate reductions
  3. Standard rate on investment services with fixed rate deductions
  4. Reduced rate on investment services fixed rate deductions
  5. New cost-sharing arrangements


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