Five years after the UK detached itself from the European Union’s VAT system, it has become apparent – as far as VAT is concerned – that the biggest Brexit winner is the UK financial sector.
Two changes have taken place since New Year’s Eve 2020 (the end of the transition period) that have reduced ‘VAT leakages’ for UK-based exporters of financial services or those with overseas branches.
Groups
The most recent change was announced by HMRC at the end of November 2025 when it decided to allow an overseas establishment of a business VAT-grouped in the UK to be treated as part of that VAT group, even when located in an EU member state that does not operate whole-entity VAT grouping.
Consequently, since intra VAT group transactions are disregarded for VAT purposes, UK businesses no longer have to account for VAT under the reverse charge mechanism on certain intragroup services.
For partially exempt businesses – such as most brokerage firms, investment banks and insurance companies – not applying the reverse charge can significantly reduce the amount of irrecoverable UK VAT.
Input tax can be deducted on financial services exports to EU
Until the end of last year, HMRC’s official policy was still that UK businesses had to follow the European Court of Justice’s Skandia judgment (C-7/13), which required businesses with branches or head offices in some EU countries to treat certain intra-entity supplies as taxable for VAT purposes.
But there is more, as HMRC also acknowledges that ‘some VAT groups may have accounted for VAT in line with the previous guidance and may now be eligible to reclaim overpaid VAT through the error correction notification procedure’.
Services
The other change occurred on the day the UK left the EU single market and customs union, with the expansion of the right to deduct input tax linked to specified supplies of certain financial services made to persons based in the EU (SI 2018/1328 and SI 2019/408).
These specified supplies include financial and insurance supplies to persons belonging outside the UK. Previously, the right to deduct was restricted to services supplied to persons belonging outside the EU.
The new regime effectively expands the right to recover UK VAT incurred on costs that can be linked to financial and insurance services exported to any of the 27 EU member states. Before Brexit, this was not possible.
For financial services groups established in the UK with many clients based in Europe, this change creates a considerable competitive advantage, bringing their tax costs down.
The door to submit retrospective refund claims is still open
Divergence
Overall, with no automatic ties to the EU VAT rules other than for Northern Ireland-based businesses supplying goods, the potential for the UK VAT system to diverge further from the EU’s, and create uncertainty in the interpretation of old and new rules, has always been a real possibility.
To provide some clarity, HMRC has issued two policy briefs: one in 2024 (interpretation of VAT and excise law from 1 January 2024) and another in November 2025 (VAT deduction on insurance intermediary services supplied outside the UK). From 1 January 2024, with the introduction of the Retained EU Law (Revocation and Reform) Act 2023, it is no longer possible to rely on directly effective rights of EU law ‘nor to disapply domestic legislation that is inconsistent with such rights or any other aspect of EU law’.
HMRC’s view is that ‘it is no longer possible for any part of UK legislation to be quashed or disapplied on the basis that it is incompatible with EU law, as UK law is now supreme’.
However, this also means that if a UK VAT-registered person believes that some UK VAT rules introduced prior to 31 December 2023 are incompatible with one or more EU law principles, the door to challenge the UK rules and submit retrospective refund claims is still open.
Consumers lose
If the winners of this new post-Brexit UK VAT world are the financial services businesses, the losers are consumers, who were originally expected to be among the better off.
The most noticeable VAT change for consumers post-Brexit has been the introduction of VAT on private school fees, which was only possible because the UK is no longer bound by article 132 of the EU VAT Directive.
Among other ‘activities in the public interest’, article 132 protects consumers and individuals (parents and students) from the imposition of VAT on any educational services, including ‘the provision of children’s or young people’s education, school or university education, vocational training or retraining’.
The introduction of VAT on private school fees in the UK was therefore a Brexit dividend for the Treasury.
