VAT and Bank Charges

Banks provide an enormous range of services to businesses and private individuals relating to financial transactions, including money transfers, savings deposits, electronic banking, credit card administration, and interest on lending. It is important to know which of these services are standard rated for VAT, and which are exempt.

This blog explains what you need to know.

Are bank charges exempt from VAT?

Services provided by banks and similar financial institutions are, generally speaking, exempt from VAT. Here are some examples of charges in connection with financial transactions which are exempt from VAT:

• Charges for the acceptance of money on account, money transfer services, the exchange of legal tender.
• Charges made by banks, building societies or similar organisations in connection with the operation of current, deposit or savings accounts. 
• Charges made by banks to customers for lack of funds to honour cheques or direct debit payments.
• Electronic banking services - services which would have been treated as exempt if they had been provided by the bank by conventional means are exempt from VAT when provided as electronic banking services.
• Interest charged on loans, advances or credit facilities.
• Credit cards - annual membership, joining and subscription charges or charges made to the cardholder for the issue of a credit card.
• Interest charged on outstanding balances on a credit card account.

VAT and other bank services

Banks charge for a wide range of services and although the majority of these qualify for exemption as financial services, most banks are VAT registered and charge for some services which are not covered by the financial exemption.

Examples of services which are not covered by the financial services exemption and on which VAT at the standard rate is charged are:

• carriage of cash
• re-stocking of cash machines and
• sorting or counting of money

However, VAT is charged only when these services are supplied on their own rather than as part of an exempt financial service.

Other services on which VAT is charged at the standard rate include:

• Debt collection services
• Charges for safe deposit facilities
• Portfolio management services.
• Charges for the issue of certain types of financial certificate (for example, audit and balance certificates supplied to third parties)
• Extra costs of special printing or overprinting of cheque books and paying-in books

What about VAT for packaged/combined bank services?

Where banks charge for a package of services it is not always straightforward to identify the VAT treatment, but HMRC advise that where a single charge is made for a number of different services, the VAT treatment is determined by the main service being provided and where the primary service is in connection with the handling of money, this is exempt.

However, this does not necessarily apply to financial services such as the provision of intermediary and outsourced services which constitute a number of component services that, if supplied separately, have different VAT liabilities. To help ascertain the VAT treatment of these services, HMRC set out certain tests in their VAT Supply and Consideration manual.

If in doubt as to the VAT treatment of charges made by banks and other financial institutions, we would advise that professional VAT advice is sought.

• See also: VAT when buying or selling a business