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HMRC internal manual

VAT Finance Manual

HM Revenue & Customs
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Money (including transfer of money) and related services: foreign exchange (forex): partial exemption and input tax

The normal input tax recovery rules will apply. Businesses making exempt financial supplies cannot normally recover the VAT attributable to those supplies unless the recipient of those supplies is located outside the EU (in which case recovery is allowed under the VAT (Input Tax)(Specified Supplies) Order 1999). Businesses involved in forex transactions which are not seen as supplies for VAT purposes are able to recover the VAT attributable to those transactions as residual input tax, subject to the partial exemption method used. However, there is no right of recovery under the Specified Supplies Order for such transactions.

Supplies by financial intermediaries can attract recovery under the Specified Supplies Order if the recipient of the intermediaries’ supply is based outside the EU, or if the underlying forex transaction is itself a supply which is made outside the EU. There is no right of recovery under the Specified Supplies Order, however, where the recipient of an intermediary’s supply is based in the UK or elsewhere in the EU but the underlying transaction is not a supply for VAT purposes. Intermediaries arranging non-EU forex transactions would therefore need to determine whether the underlying transaction is a supply.

Businesses’ partial exemption methods may need to be reviewed to reflect the most recent litigation and consequential guidance that has been published by the Department in connection with forex. In respect of this, businesses may wish to be reminded that there are provisions for excluding, in certain circumstances, incidental financial transactions from values-based calculations in partial exemption methods and the provisions of Regulation 106 of the VAT Regulations 1995 allows for *de minimis *levels of exempt input tax to be treated as attributable to taxable supplies. Further information on this will be contained in VAT Notice 706, Partial exemption. Whilst the Department would wish to avoid disproportionate changes resulting from any partial exemption method changes arising from its revised forex policy, any proposed changes will need to result in a fair and reasonable method.