Fintech businesses are generally only permitted to recover a proportion of the VAT they incur. This is because they commonly make a mix of ‘taxable’ and ‘exempt’ supplies for VAT purposes. We assist many clients in this area from the outset as it can get complex quickly but here is a flavour of the general rules around input VAT recovery to get you started.
Where a fintech is carrying on ‘taxable supplies’ for VAT purposes, VAT on directly attributable business costs can be recovered. Where a fintech is carrying on VAT exempt activities for VAT purposes (e.g. including certain insurance, credit and finance services), no VAT recovery is allowed on directly attributable business costs. For costs that are consumed by the business as a whole, VAT recovery will depend on what proportion of your total supplies (sales) are considered to be ‘taxable supplies’ for VAT purposes, as well as whether you have agreed a specific VAT recovery approach with HMRC.
If your fintech is partially exempt, the ‘standard method’ is often the starting point for calculating how much input tax on costs is recoverable – this must be used unless you have agreed a ‘special method’ with HMRC. A special method should be agreed if the standard method does not provide a fair and reasonable result for your fintech.
We often help fintechs to determine whether the standard method is providing a fair result and if not, to approach HMRC to agree the best special method for them.
Please note VAT recovery is never allowed on client entertainment or non-business costs.