Are Bank Charges Exempt From VAT

VAT may be necessary, but few of us enjoy being surprised by a charge we thought was included in the price of something but wasn’t when paying through legal tender or a note payable. Some institutions have even taken to charging VAT on financial services, depending on what they offer.

But what about bank charges? Can you reclaim VAT on them and what would be the appropriate accounting code for that?

Let’s dive right in.

What does VATable mean?

The abbreviation “VAT” stands for value-added tax. It is a conventional means that is a tax imposed by the government on different categories of goods and services. The VAT supply plays a key role in many global economies because it contributes to the provision of government goods and services to the public and is used as a source of funding for such services.

Charged as a percentage of a price, this percentage amount can vary. The precise percentage depends on whether goods or services are charged at the standard VAT rate, a reduced rate or are zero-rated at 0% and require no VAT payment but which still fall under the ambit of VAT.

However, there are also items and services that are completely exempt from VAT, such as services provided by the UK post office or MOT certification fees.

What are bank charges and what are the requirements?

In simple terms, bank charges are the fees that are charged by banks, financial institutions or building societies for the services they provide to their individual or business customers. 

Some examples of the fees that banks charge for include the following services:

• Transfers;
• Direct debit payments;
• Currency exchanges;
• Running bank accounts;
• Assessing a loan;
• Issuing a credit card;
• ATM withdrawals or usage of cash machines;
• Electronic banking services;
• Monthly maintenance fees for savings accounts, for example;
• Overdraft fees;
• Subscription charges;
• Foreign transaction fees, and other services.

Charges made by banks and similar organisations are a part of their service offering. But you may be wondering if you can claim VAT on them. We explore if bank charges are VATable in more detail below.

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Are bank charges VATable?

Dealing with such charges can be tricky, especially if you’re an employer. That being said, here’s what you should know about whether bank charges are VATable or not:

VAT laws differ between countries, but the majority will not charge VAT for bank transfers. Certain other fees may be incurred, but they come from the bank, not the government. 

In the United Kingdom, there is no VAT on bank charges.

Which bank services are VATable?

According to the UK government, financial services are exempt from VAT, with several exceptions. 

The following is a brief list of some of these exempt financial services, on which VAT is payable and which must be paid when submitting your VAT return:

• Bookkeeping services and taxation advice;
• Debt collection and credit control;
• Depository and trustee services;
• Equipment leasing;
• Executor and trustee services and the administration of estates;
• Professional advice such as investment, finance and taxation advice;
• Management consultancy;
• Merger and take over advice;
• Portfolio management;
• Registrar services;
• Safe custody and safe transportation services;
• Service companies’ activities, such as administration, payment of salaries and wages;
• The issue by a bank of a note payable to bearer on demand.

Another key element that emerges is that it is also important to look at the entirety of the service being provided. This will determine the accurate supply position and the liability of the supply or supplies. A distinction is therefore made between single and multiple supplies.

Certain tests are applied in these cases to determine if and how much VAT charged should be noted in tax returns. There are also different VAT rules applicable for outsourced services, as part of service companies activities. This is why you need to be aware of whether these fall under the ambit of VATable or exempt financial transactions. The UK government’s consideration manual offers detailed advice in this regard.

It will also be important to determine if a vendor is VAT registered, if they offer component services, if it falls under the description as an outsourced service and further details before audit and balance certificates can be issued.

What about VAT for packaged or combined bank services?

To determine if you are obligated to pay VAT for packaged or combined bank services, you need to look at the service in question. 

Then, determine whether it falls under the single or multiple supplies rule, followed by carrying out the right tests to determine your VAT rate. 

Should bank charges be covered on your VAT return after all?

In the UK, some people are required to file VAT returns when declaring their taxes for VAT purposes. But should one declare their bank transfer charges on their VAT return or or pay VAT  on them?

In general, bank charges are exempt from one’s VAT return, except when they’re related to the issuing of some financial certificates or the cost of special special printing or overprinting. Since the VAT treatment charges are meant to be included, the proper code for that would be “T2”, which responds to being exempt from paying input tax.

Please remember that you’re almost guaranteed to be charged a small transfer fee, usually a minimal fee, especially for international transfers. However, that fee is issued internally by the bank and doesn’t need to be reported on your return. 

Remember also that banks are charged differently for their VAT and that is why they are supplied separately when it comes to filing their own tax obligations for VAT liabilities.

Final thoughts

VAT and different VAT liabilities can be complicated and hard to understand. Luckily for the average consumer, most products and bank services we pay for have their VAT included in the price. 

Fortunately, myPOS transfers are explicitly exempt from this law as well as other bank transfers in most places, so it’s not something you need to worry about!