Financial Services - VAT

Introduction

Most Financial Services are Exempt from VAT under the VAT Exemption but there are some services that are not covered by the Finance Exemption and as such are charged at the Standard Rate of VAT when supplied in the UK.

VAT Law

UK VAT law is contained in the Value Added Tax Act 1994, which is referred to in this notice as the VAT Act.

Services that, although connected to financial services, are not themselves exempt:

bookkeeping services - Standard rated VAT applies when supplied in the UK
debt collection and credit control - Standard rated VAT applies when supplied in the UK
depository and trustee services - Standard rated VAT applies when supplied in the UK
equipment leasing - Standard rated VAT applies when supplied in the UK
executor and trustee services and the administration of estates - Standard rated VAT applies when supplied in the UK
investment, finance and taxation advice - Standard rated VAT applies when supplied in the UK
management consultancy - Standard rated VAT applies when supplied in the UK
merger and take-over advice - Standard rated VAT applies when supplied in the UK
portfolio management - Standard rated VAT applies when supplied in the UK
registrar services - Standard rated VAT applies when supplied in the UK
safe custody and safe transportation services - Standard rated VAT applies when supplied in the UK
service companies’ activities, for example administration, payment of salaries and wages - Standard rated VAT applies when supplied in the UK
the issue by a bank of a note payable to bearer on demand (but taxable at the zero-rate
valuation of assets - Standard rated VAT applies when supplied in the UK
assessing the direct tax liabilities of a holding - Standard rated VAT applies when supplied in the UK
investment analysis - Standard rated VAT applies when supplied in the UK
market sector research share consultancy - Standard rated VAT applies when supplied in the UK
general financial or investment advice - Standard rated VAT applies when supplied in the UK
accountancy services - Standard rated VAT applies when supplied in the UK
tax and legal advice - Standard rated VAT applies when supplied in the UK
supplying a draft prospectus - Standard rated VAT applies when supplied in the UK

Where these services merely form one element of the service being provided, it will be necessary to look at the whole service being provided in order to determine the correct supply position and the liability of that supply or those supplies.

Single or multiple supply

Certain financial services, such as the provision of intermediary and sub-contracted ‘outsourced’ services, can constitute a number of component services that, if supplied separately, may have different VAT liabilities. In order to establish the correct liability of such packaged services you may need to apply certain tests to ascertain the overall liability of your supply. You can find further information in the HMRC VAT Supply and Consideration manual (VATSC80000)

Outsourced services

If you provide sub-contracted (or ‘outsourced’) services to a supplier of exempt financial services, such as a bank, the liability of your supply depends on the nature of the service you perform. It does not become exempt simply because your customer uses your service in making its own exempt supplies.

You must determine the exact nature of your supply. For it to be exempt, it must, when viewed broadly, form a distinct whole, fulfilling the essential functions of a supply described within the finance exemption set out in the VAT Act, Schedule 9, Group 5

Input tax

You are entitled to deduct the input tax incurred that you use or intend to use in making taxable supplies. You cannot normally deduct input tax where this relates to exempt supplies (although special rules apply to supplies of financial services made to persons located outside the UK and EU. If your input tax relates to both taxable and exempt supplies, you can normally deduct only the amount of input tax that relates to your taxable supplies. You can find further information in HMRC Notice 706 Partial exemption.

If you purchase capital items for business use you may need to make adjustments of input tax in subsequent years. Capital items are assets that are capable of being used in your business over a period of years. The items concerned for which adjustments may be necessary include computer equipment, land, buildings and refurbishments. You can find further information on this in HMRC Notice 706/2 Capital Goods Scheme.

Financial services made to, or received from, persons belonging outside the UK

If you make financial services to or receive them from people who belong outside the UK you should read HMRC Notice 741 and 741A Place of Supply of Services. It explains when you can treat services that are supplied to a person belonging outside the UK as outside the scope of VAT. It also explains how you should account for VAT on the receipt of certain financial services from outside the UK (reverse charge).

You should note that not all the finance related services mentioned in HMRC Notice 741 Place of Supply of Services are exempt from VAT when supplied within the UK.

Sorting and counting money

When supplied on their own the following are taxable:

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

This is because the services being applied to the money are the same as those that could be applied to any type of goods that can be counted, packed, delivered, collected and reconciled.

Services that include an element of making payments or transfers between bank accounts are exempt. Where a supply has a mixture of taxable and exempt elements, its overall character will determine the liability.

Certain supplies of bank notes

The first issue, by the bank of issue, of Bank of England, Scottish and Northern Irish banknotes is zero-rated. This provision overrides the exemption allowed for dealings with legal tender banknotes.

Payment services for household bills

If you accept over-the-counter payments for household bills and charge for the service, your supply is exempt.

2.6 Dealing with numismatic and investment coins

If you sell bank notes or coins, whether or not they are legal tender, as:

collectors’ pieces
investment articles
items of numismatic interest

your supply is normally taxable on the full selling price, whether or not they are sold for more than their face value. Examples include:

bank notes
proof coins
Maundy money
precious or base metal coins

However, if you make supplies of collectors’ items of numismatic interest, you may be able to use the special scheme explained in Notice 718 Margin Scheme for second-hand goods, works of art, antiques and collectors’ items. Sales in some gold coins are exempt as investment gold. Further information is provided in HMRC Notices 701/21 Gold and 701/21A Investment gold coins.

Foreign exchange transactions

Foreign exchange transactions are normally exempt supplies. If you act as principal, then the consideration is the net result of your transactions over a given period of time plus any fees or commission charged. However circumstances may arise where you enter into a foreign exchange contract that does not provide for a consideration in any form. In this instance there may not be a supply for VAT purposes. For further information please see HMRC VAT Finance Manual (2740).

Clearing and settlement services

A service supplied by a clearing-house for settling indebtedness between members is an Exempt supply.

Automated Teller Machines (ATMs)

The provision of an ATM and software

Supplies of an ATM itself or the software required to run it are both taxable (Standard Rated), whether or not the consideration is based on the ATM’s use.

ATM replenishment

Services provided in connection with the routine operation of an ATM, including filling with cash, maintenance and repair, are taxable (Standard Rated) supplies.

Convenience, interchange and reciprocity fees

ATM providers sometimes make charges that are described as convenience fees, interchange fees or reciprocity fees. Where the charge is for:

the facility to obtain money
the provision of money
transaction processing
the operation of accounts

the supply is exempt.

Site rental

The granting of a right to permanently attach an ATM to the ground, or for its incorporation into the fabric of a building, is an exempt supply unless the grantor has elected to waive exemption. Further guidance can be found at section 2 of HMRC Notice 742 Land and property.

Current, deposit and savings accounts

Many of the charges made by banks, building societies or similar organisations in connection with the operation of a current, deposit or savings account will be exempt.

Exceptions include charges made for:

the issue of certain types of financial certificate (for example, audit and balance certificates supplied to third parties)
the extra cost of special printing or overprinting of cheque books and paying-in books

Please note that the above list is not exhaustive.

Charges made for dishonoured cheques or direct debit payments

As either a bank or a supplier of goods or services, you may charge your customers, because:

they have failed to honour their cheques or direct debit payments
and, if you are the supplier, you have borne the cost of bank charges

If you are a bank making such a charge to your customer, the charge will be a part of your overall service for running the customer’s account and will be exempt from VAT.

If you are a supplier making such a charge to your customer, the charge will be outside the scope of VAT.

Banking Services

Provision of information on the state of the client’s accounts by the bank providing the electronic banking services, bank statements, the transfer of funds and the debiting and crediting of accounts. These services are Exempt.

Provision of information on share prices, foreign exchange rates, balances on accounts with other financial institutions. These services are Standard Rated.

Hire of equipment which can be used for other purposes (for example where the link gives access to Bloomburg). These services are Standard Rated.

Sale of equipment. These services are Standard Rated.

Deductions from pay

If, as an employer, you charge for deductions from the pay of your employees for items such as:

insurance premiums
mortgage repayments
union subscriptions

your supply is exempt.

Securities for money

A security for money can be described as a document under seal or under hand for consideration containing a covenant, promise or undertaking to pay a sum of money. Securities for money are not restricted to a specific type of document: examples include bills of exchange, financial guarantees and promissory notes.

The issue of a security for money is exempt.

Travellers’ cheques

The issue or encashment of travellers’ cheques is exempt.

Loans, granting of credit and advances

If in the course of your business for a consideration you:

supply credit
advance money in the form of loans
provide overdrafts or other advances

your supply is exempt.

The charge you make for a loan, advance or credit facility is usually described as interest. The value of the exempt supply in the grant of credit or loan is the gross interest or other sum received, but not the repayment of capital loaned.

Interest received on money deposited is consideration for an exempt supply.

Instalment credit finance

This type of credit is usually advanced in connection with the supply of goods, and may be under a hire purchase, conditional sale or credit sale agreement. The provision of instalment credit in these situations is exempt where a separate charge is made for the facility of instalment credit and disclosed to your customer.

If this condition is satisfied, the supply of credit is exempt and the supply of goods taxable, the value being the cash price stated in the agreement before any deposit or any part exchange value is deducted.

If you do not satisfy this condition, the full amount paid by the customer is consideration for the supply of goods.

The full amount of VAT on the goods is accounted for at the time of supply. Usually this is when the goods are delivered, but it may be preceded by any part payment, or the issue of an invoice.

Conditional sale, hire purchase and credit sale

Conditional sale - means the sale of goods where the price is payable by instalments. The goods remain the property of the seller until the full price is paid or the customer meets another agreed condition.

Hire purchase - occurs under an agreement for the hire of goods for periodic payments, where the hirer has the option to purchase.

Credit sale - means the sale of goods which immediately become the property of the customer, but the price is payable in instalments.

What supplies are not considered exempt credit

The provision of the following to your customers are not supplies of exempt credit:

Late payment penalties

If you do not explicitly allow your customers to defer payment (see paragraph 4.5) and impose a penalty because they have not paid by the due date, the penalty is not consideration for a supply and is outside the scope of VAT.

Discount for prompt payment

If you offer a discount on condition that your customer pays for your supply of goods or services within a specific time, then the VAT value will be based on the actual amount paid by your customer. See HMRC VAT Notice 700: the VAT Guide for further details and invoicing requirements

Personal Contract Purchase (PCP)

Some Personal Contract Purchase (PCP) or similar contracts may be described as HP. If they contain a contractually optional payment exercisable at the end of the contract, which at the outset of the contract is set at or above the anticipated open market value of the asset at the time the option will be exercised. They are treated as a supply of leasing services. There is therefore no supply of credit and the full value of each instalment is taxable - even if part of the fee is shown as credit in the agreement.

Deferred payments

You may allow customers to defer payment but make an extra charge for allowing them to do so. If the charge relates to periods before and up to the time of the supply (see HMRC VAT Notice 700: the VAT Guide) it is not a charge for credit, but is further consideration for the supply of the goods or services. Alternatively where you agree to defer payment beyond the time of supply and make an additional charge for doing so, such a charge will be consideration for an exempt supply of credit.

interest charged on the outstanding balance on a card account

Credit Cards

Interest charged on the outstanding balance on a card account is Exempt

Annual membership, joining and subscription charges or charges made by card companies to the cardholder for the issue of the card is Exempt

The charge made to merchants (retailers) by credit card companies. This charge usually takes the form of discounts from the amounts the card companies reimburse the merchant is Exempt

Joining fees charged to merchants by card companies is Exempt

Imprinter/terminal rental charges are Standard Rated

The consideration for a sale of goods for example imprinters/terminals in connection with any card scheme is Standard Rated

Credit Management Services

If you provide credit management, and you do not grant the credit, your supply is taxable. If, on the other hand, you grant the credit and also manage that credit, your supply will be exempt.

A supply by a third party of taxable credit management could typically include the following features:

credit checking, this includes debt profiling, assessing credit worthiness, electoral roll checks and obtaining references
valuation of assets such as property, land, vehicles
authorisation services (including those that go beyond just checking the applicant’s signature or agreeing credit or payment within limits set by the person providing the credit)
taking decisions on credit applications on behalf of the credit provider
creating and maintaining records on behalf of the credit provider in order to enable them to fulfil their legal obligations, such as those relating to credit applications, payments and credit transactions
monitoring a payment record or dealing with overdue payments (although read section 5 on debts and related services)

The above list is not exhaustive.

Provision of outsourced services to a loan provider

If as a business you provide a package of outsourced service to a loan provider that consists of services prior to and after the granting of a loan, your supply to the loan provider is exempt if you provide all of the following services as a central part of that supply:

the operation of bank accounts on behalf of the credit provider
arranging the transfer of funds to the borrower, and
the processing of loan repayments (and any additional charges or fees) by direct debit or cheque

Debt collection

The supplies made by a debt collection agency, or by someone involved in debt collection, are taxable. Debt collection covers the collection of debts of any nature, even if payment of those debts has been received before, on, or after their due date.

Although debt collection service undertaken on behalf of a creditor company may involve some negotiation of the repayment of a debt by the debtor to the creditor this will not be an exempt debt negotiation service.

For example if you:

issue letters to the debtor on behalf of the creditor demanding payment
seek to chase the debt in some other form (for example trying to contact the debtor by phone.)
seek to locate a debtor on behalf of the creditor
provide accounting services to the creditor (that is you monitor the debtor’s payment account and notify the creditor of any defaulted payments)

These services will be taxable (Standard Rate). Any debt negotiation services will be ancillary to the principal service of debt collection.

The above list is not exhaustive.

Insolvency Practitioner Services

The supplies made by an Insolvency Practitioner are normally taxable (Standard Rated)

Where an Insolvency Practitioner acts as both nominee and supervisor in any type of formal Voluntary Arrangement then the supplies by the Insolvency Practitioner are exempt

Further details on Insolvency Practitioner services can be found in the VAT Finance manual (VATFIN3260).

Shares, securities and other financial instruments

The issue of securities such as shares, bonds, loan notes, debentures, are not supplies for VAT purposes when the purpose of that issue is to raise capital. This includes the issue of units or shares in an investment fund.

Input tax incurred that relates to an issue of shares or other securities will be recoverable to the extent that the issuer’s business activities generate taxable supplies.

VAT Finance Manual (4250) provides further details on this. For further guidance on input tax recovery please read VAT Notice 706: partial exemption.

Transactions in securities that are already in existence are exempt when they are sold or transferred in the course of a business activity and the normal partial exemption rules apply.

Stock lending

Stock lending describes a situation where one person, the ‘lender’, transfers to a second person, the ‘borrower’, the legal title, along with all the dividends and rights, to securities. The borrower agrees to return to the lender, at a later date, an equivalent number of the same securities as those received.

Stock lending is an exempt supply, the consideration being the fee charged to the borrower.

Where stocks are loaned, the borrower who holds legal title receives dividends, which are not consideration for a supply

Share underwriting

A share underwriter guarantees to buy a proportion of any unsold shares when a new issue is offered to the general public, and usually receives either commission or charges a fee. A share underwriter may also underwrite an issue by agreeing to guarantee that buyers will be found. In either case the supply is exempt.

There is not a supply for VAT purposes by the issuer who sells the securities to the underwriter (see paragraph 6.1), but there is a subsequent exempt supply by the underwriter when those securities are sold.

Nominee services

You are a nominee if you hold securities in your own name on behalf of a third party (the beneficial owner). Your services of acting as nominee are exempt. This includes charges for transferring stock from one nominee to another which is seen as an exempt transaction in securities.

Custody Services

There are 2 types of custody services, safe custody and global custody.

Safe custody

Safe custody services are taxable (Standard Rated). These services include the provision of the purely physical service of safekeeping, sometimes referred to as safe deposit facilities. A supply of safe custody services is taxable if you, as a business in the UK, contract to supply the service to your client irrespective of whether the securities are held in the UK, an overseas branch of your business or elsewhere.

If you lease or hire a specific site to your client rather than provide a service of secure storage within your premises, the supply is in the UK if the site is in the UK, but outside the scope of UK VAT if the site is overseas. You may have to account for VAT in an EU member state if the place of supply is in the EU.

Global custody

Global custody services are a package of services that may include safe custody, the collection of dividends or interest on securities held, dealing with scrip and rights issues and payment against delivery of stock. This package of services including the safe custody element is exempt.

Services of a share registrar

Services of a share registrar may include some or all of the following:

all aspects of operating company share registers
administration of scrip schemes, share option schemes, profit sharing schemes and dividend reinvestment plans
arrangements for advertising the closure of the share offer
attending shareholders’ meetings and organising polls at such meetings
arranging ‘break out’ for bulk nominee accounts
capital gains enquiries, and other correspondence and enquiries
conversion of loan stock
preparation, designation and despatch of certificates, correction of errors on certificates, and issuing of duplicated documents
administrative services in relation to mergers, placings, rights issues, reorganisations and acquisitions
processing forms of proxy
registration of grants of probate
regular reports on share movements
administrative services in relation to savings plan schemes

This list is not exhaustive.

The liability of a share registrar service is taxable at the standard rate of VAT.

Listing fees charged by regulatory bodies

Fees charged by regulatory bodies, such as the Financial Services Authority, for listing companies that wish to float on an exchange are outside the scope of VAT.

Fees charged by stock exchanges

Many exchanges charge fees to their members for admission to the exchange, as well as market maker charges, transaction charges and exchange charges.

Basic admission or membership charges are taxable at the standard rate, with the place of supply being where the recipient belongs following changes to the place of supply rules introduces on 1 January 2010.

The liability of other charges depends on exactly what is being done by the exchange for the charge. If the service is not an intermediary service (see section 9) then the fee will be taxable at the standard rate.

Arranging the issue or placement of securities

If you arrange the issue or placements of securities, whether as offers for sale, rights issues, cash offers, vendor placings or bids with underwritten cash alternatives, including the service of co-ordinating an issue when a number of participants are involved in the share or other placings, your service is exempt.

The provision of advice is taxable (Standard Rated)

Execution only services

If you supply execution only services, for example, buying or selling securities on your client’s instructions, but do not offer advice on securities, your supply is exempt.

Dealer systems / Trading Platforms

Many transactions in securities are effected by electronic means. If you operate a dealing system that allows a user to insert a bid and offer quotes for securities, another user to insert an acceptance and for the system to match and sell deals, your supply of the dealing system is exempt, but only where you run that system.

Data services

If you:

lease or sell software, or the system itself
provide electronic data services that simply provide subscribers with a message facility or an information service, for example on share price movements or financial news

your service will be taxable (Standard Rated).

-Contains public sector information licensed under the Open Government Licence v3.0.