UK law has, until now, permitted partly exempt businesses in the UK (such as many banks and other financial institutions) to recover VAT on their overhead costs which are attributable to foreign branches.

Following the decision of the CJEU in Credit Lyonnais1 , which confirmed that the Principal VAT Directive did not permit a company to take into account the turnover of its EU, or non-EU, foreign branches when calculating how much input tax it is able to deduct, UK law is changing to prevent input tax recovery in these circumstances.

The measure, announced in last week’s Budget, and coming in to force (in most instances) on 1 August 2015, will mean that UK businesses will no longer be permitted to take into account supplies made by foreign branches when carrying out their partial exemption calculations irrespective of any “special method” currently agreed with HMRC.

To read HMRC’s notice click here.