UK closes £100m banking & insurance VAT loophole in budget

Sun 22nd Mar 2015

The UK is to close a tax loophole costing almost £100m per annum relating to the recovery of VAT by banks and insurers with foreign branches.

The closing of the loophole follows a European Court of Justice VAT ruling on Credit Lyonnais in 2013. Generally, banking and insurance (Financial Services) is VAT exempt. But if a financial institution is providing some taxable supplies, for example outside of the EU, it is entitled to deduct a proportion of its input VAT suffered on costs incurred running any foreign branches it may have. In the Credit Lyonnaise case, it included interest charges on non-French branches in its French input VAT deductions. The ECJ ruled that the bank could not include foreign branches in its French VAT return calculation – so the bank lost the right to deduct.

In this week’s UK budget, the Chancellor announced that UK VAT law would be amended to reflect the ECJ case. This is estimated that this will save the UK Treasury almost £100million per annum.

The measure will come into effect on 1 August 2015.  Many international banks and insurers with London-based principle establishments will be hit be the measure.

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