In the UK, banks provide various services for private individuals and businesses relating to financial transactions. However, it is essential to know which services are VAT-exempt and standard-rated. One of the most common questions people ask is “Are bank charges VATable?”
Most standard bank charges are VAT-exempt. Charges for money transfers or operating current accounts don’t include Value Added Tax (VAT). Nonetheless, the VAT treatment of certain banking services can vary depending on the type of service provided. This guide highlights which bank services are subject to VAT, and why most banking fees are exempt. This guideline helps you to handle bank charges on VAT returns.
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What is VAT on Bank Charges?
The bank charge is the amount that banks charge for providing financial services. These charges can differ from one bank to another. But, the important question here is, “Are bank charges VATable?”
According to the recent UK tax regulations, services including money transfers, interest on loans and operating a current account are VAT-exempt. This means there is no VAT on bank charges.
Your monthly statement rarely shows VAT because most standard bank charges in the UK are considered financial intermediation.
Are Banking Services VAT Exempt?
Yes. Most core banking services are VAT exempt under UK VAT law.
Still, not all bank charges are exempt. Certain administrative, advisory, or non-financial services provided by banks may be subject to VAT at the standard rate (20%).
What is VAT, and What are its Requirements?
Value Added Tax (VAT) is a tax levied by the HMRC in the UK. As an organisation, if your income has crossed the threshold of £85 000, your business is liable to pay a standard rate of 20% on the earned income. The reduced rate or 5% or zero rates might also apply to specific requirements.
The VAT rates will vary slightly in the case of self-employed persons or contractors. However, in the case of enjoying the bank services, the HMRC have exempted the bank charges from the VAT rates. The use of bank services does not require the business firms to make VAT payments or claim VAT deductions from the HMRC.
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What are the Common Exempt Bank Charges in the UK?
Here are some common bank charges that are exempt from VAT:
Transaction Fees
Charges for making transfers, standing orders and payments are VAT-exempt.
Loan Interest
Interest payments and overdraft are always VAT-exempt.
Monthly Account Fees
Standard fees for maintaining business current accounts are also exempt from VAT.
Check Processing
Bank charges for stopping or clearing a cheque are VAT-exempt
CHAPS/BACS Fees
Bank charges for processing an electronic transfer are also exempt from VAT.
Now that your question, “Are bank charges VATable?” has been answered, let’s discuss what bank charges are VAT-exempt.
VATable Bank Services
However, the usual bank services, where you transfer funds and enjoy the services related to bank and savings accounts, do not require you to pay VAT. Except for the following services, which you are using from the bank, the bank charges a fee for the provision of these services.
- Bookkeeping services
- Debt collection and credit control
- Depository and trustee services
- Equipment leasing
- Executor and trustee services and the administration of estates
- Investment, finance and taxation advice
- Management consultancy
- Merger and takeover advice
- Portfolio management
- Registrar services
- Safe custody and safe transportation services
- Service companies’ activities, for example, administration, payment of salaries and wages
- The issue by a bank of a note payable to the bearer on demand (but taxable at the zero rates)
In short, the financial services covering the financial payments and transfer of funds cannot include VAT in the bank charges. On the other hand, any financial services related to counting, delivery, packing, and collecting reconciling can be considered VATable in the UK.
Similarly, if someone is providing the VAT-exempted financial services as an outsourced service, they must pay VAT by examining the right kind of VAT with the help of HMRC. Similarly, if a person is making financial transactions outside the UK, all the transactions will be exempt from VAT.
Do Bank Charges Have VAT on Them?
Yes, several bank charges are subject to VAT. Core bank charges are VAT-exempt, but banks provide a range of ancillary services that are 20% standard-rated. VAT is likely applied to advisory, administrative or data-related services.
Safe Custody Services
If your bank is storing your physical assets like gold bars or jewellery in a physical safe-deposit box, it is subject to VAT at 20%. Since a safe-deposit box is considered a storage service rather than a financial transaction, VAT applies to these charges.
Professional Fees
If a bank offers personalised advisory services, such as tax planning, specialised investment research or acquisition advice, these services are standard-rated.
Certain Data Services
Banks provide detailed financial data feeds like those used for high-frequency trading software, and these services can be subject to standard-rated VAT.
Legal and Notary Services
Bank charges for providing legal certifications, acting as a notary public or witnessing documents are standard-rated services.
How to Claim Bank Account Fees
Understanding “Are bank charges VATable” is crucial for businesses and self-employed individuals to comply with HM Revenue and Customs (HMRC) and maintain accurate financial transactions.
It helps you distinguish taxable and exempt services. You can avoid penalties by filing your VAT returns correctly. Moreover, it helps you prevent invalid input tax claims.
According to the HMRC guideline, you cannot claim VAT on most bank charges because they are exempt from VAT. Zero-rated services allow VAT recovery, whereas exempt services do not.
Nevertheless, there are exceptions where you can claim VAT on bank charges. You can reclaim VAT on bank charges that are at the standard rate of 20% (administrative services).
Is There VAT on Bank Interest Charges?
No, there is no VAT on bank interest charges. According to HMRC 701/49: Finance, “the charge for a loan, advance, or credit facility is considered consideration for an exempt supply of financial services.” Exempt bank interest charges include:
- There is no VAT charged on interest by your bank
- HMRC charges “late payment interest” when you pay VAT late. Since this is a statutory charge, it does not have VAT to it.
- Under the Partial Exemption rules of HMRC, if your business earns significant interest income, it might limit how much VAT you can reclaim on your overall business overheads.
Visit the official website of HMRC and learn more about the Partial Exemption Rules of HMRC, and clear your confusion regarding “Are bank charges VATable?”
VAT on bank charges or other related financial issues can be best managed by qualified accountants and bookkeepers at the AccountingFirms in the United Kingdom. Reach out to us!
VAT on Your Statements
Bank statements are not VAT invoices because most charges are exempt. To reclaim VAT on taxable services, you must receive a valid VAT invoice. Banks often issue Account Statements instead of VAT invoices because most bank charges are exempt. You can use VAT statements to reconcile what is owed to or reclaimable from HMRC.
Note: To reclaim VAT on business expenses, you must have a valid VAT invoice.
What is VAT for Combined Bank Services
VAT treatment for combined bank services depends on whether the bundle is classified as a mixed supply or a single composite supply.
If your bank offers a package where one service is the principal element (VAT exempt), and others are ancillary elements, the VAT status of the principal service applies to the entire charge.
Nonetheless, if the bundle contains different and independent services with different tax treatments, the bank must allocate the fee and charge 20% VAT only on the taxable portion.
The Bottom Line
To answer your question: Are bank charges VATable? The answer is no. Most fees associated with the daily financial transactions are exempt from VAT under HMRC rules.
However, there are exceptions. VAT is applied to charges for ancillary services. Services such as safe custody services, professional fees, legal and notary services and others are subject to 20% VAT standard rate.
Understanding the VAT treatment of bank charges helps businesses avoid incorrect input tax claims and ensures compliance with HMRC regulations. Check your statements for VAT so you never miss out on potential tax recovery.
Speak to an Expert
Get in touch with our skilled professionals for expert UK tax and accounting solutions specialised to minimise your tax burden and resolve your financial challenges efficiently.
How AccountingFirms Can Help?
If you need the best bookkeeping and accounting services in London, visit our website, AccountingFirms, and discuss your finances with our experts. Our professionals have extensive knowledge of VAT, and they handle the entire tax process effortlessly.
Reach out, get an instant quote, and let us help you stay compliant!
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.
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