Refunds of UK VAT for Non EU Businesses – Insurance and Financial Transactions
Background
Where a non EU business purchases goods or services from a UK VAT registered business, in many cases it will not be charged UK VAT. However, there are many instances where UK VAT will be charged and if a non EU business is not registered for VAT in the UK it will not be able to recover this charge through the submission of a VAT return.
There are though, provisions which allow a non EU business to seek to recover VAT incurred in the UK directly from the UK authorities. The UK has though placed restrictions on certain businesses using this procedure which have now been challenged before the European Court. The implications of this challenge are set out below.
Businesses eligible to use the scheme
A non EU business can use the refund scheme so long as:
• It is not registered, liable, or eligible to be registered for VAT in the UK;
• It has no place of business or other place of residence in the EU;
• No supplies of goods or services are made in the UK, with the exception of international transport services or services where the customer accounts for VAT.
• The VAT incurred has not been used for the purpose of insurance and financial transactions.
European Court Hearing
The legislation which blocks non EU businesses recovering VAT which is incurred in relation to insurance and financial transactions was introduced with effect from 3 December 2004. The change in the legislation was designed to block a specific VAT planning scheme which was subsequently defeated on the principle of abuse on rights. However, the block on VAT recovery for insurance and financial transactions has remained within the UK legislation.
The European Commission, however, took the view that this part of the UK legislation was not allowed under the Thirteenth VAT Directive, which sets out the rules that each Member State should introduce into their domestic legislation. In particular it has argued that the UK can not refuse to refund VAT to non EU businesses where a business established in the UK is entitled under UK domestic legislation to recover the VAT in relation to supplies to non EU recipients.
As a consequence, the Commission took infringement proceedings against the UK and the case will be heard by the European Court of Justice on 10 February 2010.
Way Forward
If the European Court finds in favour of the Commission, it means that the UK has been refusing to repay claims from non EU businesses in breach of the EU VAT legislation. This will require the UK to amend its domestic legislation so that such claims will be accepted in the future, and it will also have to address claims which have been rejected in the past.
The position of non EU Businesses which never submitted claims because of the UK legislation must also be addressed.
Those non EU businesses which have had claims rejected, or never submitted claims, should consider establishing the VAT which has been incurred since 2004 in relation to insurance and financial transactions, so that if the Court rules against the UK they can consider making claims for the VAT.