The changes are detailed in regulations which have been published today.
"These changes will increase the level of VAT recovery available for financial institutions in the UK making supplies to EU clients, as currently those supplies do not give a right to recover VAT," said Maryse Heijnen, a VAT expert at Pinsent Masons, the law firm behind Out-Law.com.
VAT is not generally charged on supplies of financial services but, in turn, businesses cannot reclaim any VAT they pay on the costs of making those VAT exempt supplies. Under current rules, which are designed to maintain international competitiveness, businesses supplying customers outside the EU with exempt financial services may reclaim any VAT they pay on the costs of making those supplies, even though those services would be exempt.
The regulations mean that if the UK leaves the EU with no deal, UK businesses will be able to reclaim VAT in relation to specified supplies made to customers in the EU. This brings the VAT treatment of supplies to EU customers in line with the VAT treatment of supplies to customers in the rest of the world.
The regulations also provide that Partial Exemption Special Methods agreed before the UK exits the EU will be interpreted in accordance with the VAT treatment that will apply after the UK exits the EU and so businesses will not need to apply to HMRC for approval of a new method after Brexit.
The regulations will only come into force on a date or dates to be specified in a further statutory instrument in the event that the UK withdraws from the EU without a negotiated arrangement.