vat on bank fees

VAT on Bank Fees: All you need to know about your Finances

Value-Added Tax (VAT) is seen in every aspect of our lives. From corporate business to personal trading ventures, VAT is applied to a majority, if not all, goods and services. This would lead one to consider, “Do bank charges have VAT?”.

Historically, many countries have given a special exemption to financial services. This decreases friction in the ability of financial institutions to provide services. Bank charges are mostly included in the definition of “financial services” and normally see tax exemption. However, in recent times, in light of the unprecedented economic and fiscal policy changes, the opinion is changing. Many are thinking of removing such exemptions.

This passes the costs onto businesses and consumers who are already affected by the drastic policy changes. It affects transaction fees. So, would the already rising interest rates on loans.

Furthermore, those who lack the ability or knowledge of VAT reclamation would face an even larger impact on their tax bills. This text aims to clarify the application of VAT on bank fees. Keep reading as we explore: Are bank charges subject to VAT and the reason behind it? Can you refund them? If not, then how do they affect us?.

What Do VAT Bank Fees Or Charges Mean?

Value-Added Tax (VAT) is an indirect tax paid by businesses offering taxable goods or services. When such a business surpasses the threshold, it becomes mandatory to pay Value-Added Tax (VAT) to the government.

Similarly, banks have the authority to charge fees in return for a variety of financial services to customers. This is often in the form of a fee that covers the bare minimum for fund transfers, providing loans, and other services. Charging VAT is a necessity to keep a VAT-registered business profitable.

Is There VAT on Bank Charges?

As with most goods and services, the VAT on bank fees isn’t as straightforward as applicable or not applicable. Rather, it varies for various charges and services, balancing the significance of tax on services alongside convenience for consumers. Below are a few examples of exempt and non-exempt charges:

Why are bank charges VAT exempt?

In the UK, bank charges are mostly exempt from VAT. This exemption particularly applies because bank charges are considered part of 'financial services', which are not subject to VAT. According to Her Majesty's Revenue & Customs (HMRC) VAT Notice 701/49, financial services, including bank charges, are exempt from VAT.

Bank Fees that are Exempt from VAT:

Knowing this, the following question comes to mind: 'Why are Bank Charges Exempt From VAT?'

Instead of VAT, banks opt to charge a minimal fee in return for financial services across different domains, such as finance management, money transfers, and acting as intermediaries for loans and mortgages. These services are necessary for the proper functioning of a bank.

Following HMRC VAT Notice 701/49, here are a few examples of bank charges that are exempt from VAT: current accounts, deposit accounts, and savings accounts. The bank should not charge VAT for these services as they fall under the 'financial services' exemption.

To further explore the application of VAT in different contexts, including its impact on specific transactions like vehicle purchases, check out our detailed article on VAT on Qualifying Vehicles.

Bank Fees Subject to VAT:

Although most financial services are tax-exempt, there are exceptions. Here are some examples of VAT on Bank Fees. Services related to financial activities that are not exempt include:

  • Bookkeeping services
  • Debt collection
  • Credit control
  • Depository and trustee services
  • Equipment leasing
  • Executor and trustee services (administration of estates)
  • Investment, finance, and taxation advice
  • Management consultancy
  • Merger and take-over advice
  • Registrar services
  • Safe custody
  • Safe transportation services
  • Service companies’ activities (e.g., administration, payment of salaries and wages as in paragraphs 2.4 and 2.13)
  • Issuance by a bank of a note payable to bearer on demand (taxable at the zero-rate as in paragraph 2.3)

A standard rate of 20% (or up to 25%) applies to a greater part of the VAT on bank fees. The legislation may vary in Ireland and HMRC regarding the United Kingdom.

Breakdown for The Consumer: Effect of VAT on Bank Fees

VAT in the financial sector can be quite a challenge to wrap your head around as a consumer with only basic knowledge. So one might wonder whether VAT has a useful role in this context, especially when the apparent benefits do not seem to justify the negatives. Here's a quick breakdown:

bank charges vatable

Benefits of VAT exemption

The impact of VAT on bank fees can greatly influence consumer behavior. Tax exemption has a positive impact. Consumers enjoy significant cost savings as they do not have to pay additional tax on fees. Similarly, fewer taxes in transactions contribute to simplicity. It also gives banks flexibility to use this exemption in maintenance charges and transaction fees.

Adding VAT to bank fees would increase costs for consumers. As previously explained, bank charges not exempt from VAT cannot be reclaimed. Furthermore, the calculation of VAT adds complexity, which is a significant negative for consumers' quality of life. Examples of this include foreign currency exchange fees and credit card fees.

Why Should Banks Charge VAT on Non-Exempt Services?

Considering all the negatives for customers, what is the rationale for banking institutions to charge VAT? Let's assume a bank is offering accounting services. It is mandatory to pay input VAT as this is a taxable service. If it is not VAT-registered (or VAT-registered but opts not to charge VAT from customers), the bank may not reclaim the paid VAT from the HMRC.

This is a poor business decision as it results in up to 20% of their profit being lost without any benefits. Additionally, it is vital to note that VAT registration implies prestige and credibility.

Can I Claim A Refund?

As explained above, VAT cannot be applied to the most commonly used bank services. Even though non-exempt bank charges exist, customers would have to keep proper records of all the bank fees on which VAT was charged when filing their tax returns. The aim is to avoid any inconvenience and future troubles. However, in most cases, a VAT refund on banking charges is not feasible.

Make sure to consult with a financial advisor for more personally tailored help with your finances. Their professional advice helps navigate the complex world of tax legislation and its intricacies. This is the recommended decision for managing your finances in the long term.

The Final Verdict

"Businesses have to incorporate Value-Added Tax (VAT) into their operations. This applies even to banking. VAT on bank fees receives exemptions for some services due to their unique status, namely 'Financial Services,' while others such as investing advice, management consultation, and safe transportation do not.

However, over time, we may see financial policies changing with political shifts, especially during times of austerity. We have also explored all the services where the bank has autonomy to apply VAT as it sees fit. Exempt fees mean more savings for customers and simplify transactions. On the other hand, adding VAT could complicate things and make banking more costly.

In the end, the decision is not set in stone. It is up to you to confirm with a professional in your region for the best financial decision. In some exceptional cases, it may be possible to reclaim VAT on bank fees. By maintaining detailed records all year round, you can help with tax returns.

Ultimately, personalized advice from a tax advisor would be your best bet. As it is quite challenging to keep up with the latest developments and manage finances with fluctuating tax rules, having expert guidance will provide a game-changing advantage."

Rían Doyle

I'm a VAT professional with years of experience helping businesses with compliance and reporting. My goal is to simplify VAT calculation and provide valuable insights through my engaging writing style and clear explanations of complex concepts.