Megan Brooks
It is important to understand which services provided by banks are standard-rated for VAT and which are exempt. Generally, services provided by banks and similar financial institutions are exempt from VAT. However, there are certain services that banks provide that may be subject to VAT. These include portfolio management services, charges for issuing financial certificates, and special printing services for cheque and paying-in books. If a bank is managing your portfolio, they can charge VAT for providing direct financial services. Additionally, if you are required to pay VAT, bank charges related to financial services may lead to a partial exemption, with VAT added to specific financial services.
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What You'll Learn
VAT is charged on portfolio management services
Generally, services provided by banks and other financial institutions are exempt from VAT. Basic bank services, such as transferring funds, are tax-free. However, VAT is added to other financial services, such as purchasing financial certificates or paying fees for professional advice.
If a bank is managing your portfolio, they are providing direct financial services, and they can charge VAT, even if they are charging a minimal fee. This applies to any tier of portfolio management, from basic tasks to full-scale portfolio work. As long as the bank is offering its expertise as a service, it may be able to charge VAT at the standard rate.
Portfolio management services can be provided on either a discretionary or advisory basis. If a manager acts on a discretionary basis, the client authorises them to invest funds on their behalf, within pre-agreed parameters. When contracted on an advisory basis, the manager must refer to the client before undertaking any investment transactions. In both instances, charges made by the manager for their management services carry VAT at the standard rate.
Dealing fees or commissions charged on a transaction-by-transaction basis for executing trades in exempt securities are VAT-exempt. This is conditional upon the portfolio management services being contracted on this basis, with transaction charges directly linked to the purchase and sale of an investment product. Where a manager does not supply trade execution services on this basis and charges for managing a client's portfolio and executing trades, those charges are liable for VAT at the standard rate.
It is important to note that if you do not pay VAT, you do not need to add VAT to the cost of any services. Additionally, if bank charges appear on your VAT return, but you do not earn enough to pay VAT, those bank charges will not require VAT to be paid.
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VAT is charged on financial certificates
Generally, services provided by banks and similar financial institutions are exempt from VAT. However, there are certain services that are not covered by the financial services exemption, and VAT is charged on them at the standard rate. These include portfolio management services and charges for the issue of certain types of financial certificates, such as audit and balance certificates supplied to third parties.
It is important to note that VAT is typically charged on financial certificates when they are provided as a specialised service. Simply transferring funds or using basic banking services does not incur VAT. The purchase of financial certificates or the payment of fees for professional advice can be connected to VAT.
In the context of portfolio management services, VAT may be charged at the standard rate even for basic tasks as long as the bank is offering its expertise as a service. This can include any tier of portfolio management, from fundamental to advanced levels.
While most basic bank charges are exempt from VAT, certain fees may be subject to VAT depending on the specific circumstances and the nature of the services provided. It is always advisable to seek professional VAT advice if there is any uncertainty regarding the VAT treatment of charges made by banks and financial institutions.
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VAT is charged on credit card services
Generally, services provided by banks and other financial institutions are exempt from VAT. Basic bank charges are exempt from VAT, as they are necessary for the bank to function. However, VAT may be charged on certain services provided by banks, such as portfolio management services, financial certificates, and intermediary and outsourced services.
Credit card services are subject to VAT in certain circumstances. VAT is charged on commissions for the acceptance of credit card payments. This commission is typically referred to as a 'merchant charge' and is paid by retailers and outlets participating in credit card schemes. The VAT is applied to the commission percentage, which varies depending on the company or financial institution. For example, a business may use a Clip terminal and be charged a commission of 3.6% plus VAT for each transaction.
VAT is also charged on credit card annual membership, joining, and subscription fees, as well as interest charged on outstanding balances. These charges are subject to VAT when supplied as a single service rather than as part of an exempt financial service.
It is important to note that VAT treatment can become complex when banks charge for packages of services. In such cases, HMRC advises that the VAT treatment is determined by the primary service being provided. If you are unsure about the VAT treatment of bank charges, it is recommended to seek professional VAT advice.
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VAT is charged on depository and trustee services
In the UK, VAT is generally not charged on bank services. However, there are certain situations where bank charges may be subject to VAT. This typically occurs when the bank provides specialised goods or services, such as depository and trustee services to investors.
Depository services, such as the safekeeping of assets and oversight of investment activities, can be subject to VAT at the standard rate. This is because the Court of Justice of the European Union has held that the functions of a depositary involve the "control and supervision" of investment activities rather than "management". Therefore, these services do not fall under the fund management exemption and are taxable.
Trustee services are also generally not exempt from VAT. If a bank is managing your portfolio, they are providing direct financial services, and VAT may be charged even if the fees are minimal. This applies to any tier of portfolio management, from basic tasks to full-scale portfolio work. As long as the bank is offering its expertise as a service, it may charge VAT at the standard rate.
It is important to note that the VAT treatment of bank charges can be complex and may vary depending on the specific circumstances and the nature of the services provided. While standard bank services, such as transferring funds, are typically exempt from VAT, other financial services provided by banks may be subject to VAT. For example, charges for the issue of certain types of financial certificates, special printing or overprinting costs, and portfolio management services can attract VAT.
In summary, while bank charges in the UK are generally exempt from VAT, certain specialised goods or services provided by banks, such as depository and trustee services, can be subject to VAT. The applicability of VAT depends on the specific circumstances and the nature of the services provided. It is always advisable to seek professional VAT advice if there is any doubt about the VAT treatment of bank charges.
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VAT is charged on ATM services
Generally, services provided by banks and other financial institutions are exempt from VAT. This includes charges for the acceptance of money on account, money transfer services, and the exchange of legal tender. However, there are certain services provided by banks that are subject to VAT.
When it comes to ATM services, fees charged to customers by ATM operators for the facility to obtain cash are known as convenience fees. These fees are typically charged by the ATM operator when the customer uses an ATM that is not in their bank network. These convenience fees are subject to VAT. It is important to note that the VAT treatment of the convenience fee is not affected if the ATM operator retains ownership of their ATM machines but outsources the cash stocking to a third party.
In addition to convenience fees, other ATM charges that may be subject to VAT include charges for non-cash withdrawal services, such as balance inquiries and 'mini-statements'. If these transactions are followed by a cash withdrawal and a single interchange fee is charged, HMRC treats this as exempt. However, charges for services other than cash withdrawal, such as information-only services, are standard-rated and subject to VAT.
It is worth mentioning that VAT treatment can become complex when it comes to bundled financial services or when banks charge for a package of services. In such cases, HMRC advises that the VAT treatment is determined by the main service being provided. If the primary service is in connection with the handling of money, it is typically exempt from VAT. However, this exemption may not apply to certain financial services such as intermediary and outsourced services, which may have different VAT liabilities when supplied separately.
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Frequently asked questions
No, bank charges do not require VAT. Basic bank charges are necessary for the bank to function and are VAT-exempt. However, VAT may be charged on certain financial services, such as portfolio management services, credit card annual fees, and interest charged on outstanding credit card balances.
Yes, if a bank is managing your portfolio and providing direct financial services, they can charge VAT even if it is a minimal fee. This applies to any tier of portfolio management where the bank offers its expertise as a service.
VAT is typically applied to goods and services, and if you are not paying VAT, you do not need to add VAT to the cost of any services. Bank services provided by conventional or electronic means are generally VAT-exempt. However, if you are unsure, it is best to seek professional VAT advice.
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