HMRC tackles VAT avoidance via offshore looping

HMRC has amended legislation to shut down a VAT avoidance scheme in which financial services exploit current rules using offshore looping

HMRC has published a consultation on draft legislation to amend article 3 of the Value Added Tax (Input Tax) (Specified Supplies) Order 1999 to restrict its use in certain circumstances to prevent avoidance.

The tax authority is cracking down on a version of offshore looping which is currently found in the insurance industry and involves looping intermediary supplies via an overseas territory.

This offshore looping structure was discovered in the recent First Tier Tribunal case concerning Hastings Insurance Services which HMRC lost. Since HMRC lost the case other insurers have come forward claiming that if the VAT avoidance scheme is not addressed then they will have no other choice but to adopt similar structures to be able to compete.

Providers of financial services cannot reclaim the VAT they incur on their costs as their service are VAT exempt. An offshore loop is a cross border structure that enables these VAT costs to be reclaimed by routing services carried out in the UK via a body located outside the EU. These services are then used to provide insurance (and other financial services) back into the UK market.

The draft amended legislation aims to prevent looping by restricting the application of the specified supplies order to cases where the final consumer is not in the UK.

Justine McInnes, an indirect tax director at RSM said: ‘The draft legislation is very broad; many transactions with non-EU counterparties are structured for commercial, regulatory or other reasons rather than VAT avoidance. This however, does not appear to be reflected in the legislation.

'There may be those who wish to satisfy themselves of the validity of any legislation which is implemented prior to making any changes to their VAT recovery – particularly where a “cost/benefit” analysis of the merits of this approach has been undertaken.'

Draft legislation: Amendment of the VAT (Input Tax) (Specified Supplies) Order 1999 is available here.

Report by Amy Austin

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