What other potential changes are in the pipeline for VAT and financial services?
Aside from the Brexit driven changes discussed above, there are a number of other developments as follows:
EU Review of VAT treatment of finance and insurance
The European Commission is currently conducting a far-reaching review of the VAT treatment of financial and insurance services. A public consultation was launched in October 2020 and has now closed. Options available include the removal of exemption from some or all finance and insurance transactions, to modify its scope through taxing only some types of services, e.g. fee-based as opposed to interest-based, to a more modest modernisation of the existing rules to remove market distortions and improve legal certainty. The Commission envisage putting forward a proposal for a new Directive by the end of 2021.
VAT treatment of fund management fees
In the 2020 Spring Statement, the Chancellor announced a review of the VAT treatment of fund management fees, and other aspects of the UK’s funds regime. The stated intention is to make the UK a more attractive location for the establishment of funds and asset holding vehicles. At the same time, a working group was set up to look at the VAT treatment of financial services generally. The review of fund management fees is not expected to commence until later in 2021.
Treasury call for evidence on VAT Grouping and Establishment
In August 2020, the Treasury issued a Call for Evidence on UK VAT group registration and the ‘establishment’ rules. It examines potential changes to the operation of VAT grouping in distinct areas, including application to branches, eligibility criteria, implementation of the Skandia judgment, compulsory VAT grouping and VAT grouping limited partnerships and Scottish partnerships. The changes as a result of the Call for Evidence could have one of the biggest VAT impacts on the UK financial sector where VAT grouping is common, in terms of ability to structure to minimise irrecoverable VAT.
Changes for private equity funds
This consultation is very relevant to private equity fund structures, which currently rely on an HMRC concession which allows limited partnerships to be VAT grouped in cases where the sole general partner of the limited partnership is a body corporate (and has a legal personality), and its role is to manage the limited partnership as a whole. This allows management fees to be outside the scope of VAT within the VAT group, reducing irrecoverable VAT. A similar concession allows corporate sole general partners of Scottish limited partnerships to join a VAT group. Given the importance of that concession to many private fund structures, any changes are likely to be significant to the industry.