Banks' service charges and VAT

[TheDebtor]

If they were services shouldn't the bank have been paying VAT on the service charges?

 

Penalty Charges are exempt.

 

I doubt they have been paying the VAT on them, which makes them Penalty Charges.

[BankFodder]

If they were services shouldn't the bank have been paying VAT on the service charges?

 

Penalty Charges are exempt.

 

I doubt they have been paying the VAT on them, which makes them Penalty Charges.

 

If this is correct then it is a brilliant point. It needs discussion so I am going to split this into a separate thread

[BankFodder]

Furthermore if the banks are making huge profits out of penalty charges and not declaring them as such and not paying VAT if this is applicable, then this would amount to a massive criminal scandal practiced by all of the banks!

Frankly, I cannot believe that they would do this. It needs more discussion

[Seminole]

I am not an expert on banking VAT but I know a little bit about it and I'm friends with the guy who literally wrote the book on VAT partial exemption for VAT for local authorities. I had a conversation with him a couple of weeks ago about this.

 

Most services that banks provide are exempt from VAT. This includes interest and charges for bouncing transactions. Some of the the things they do are standard rated depending on how they are provided. Thus, for example, a loan arrangement fee may be subject to VAT at 17.5%.

 

Penalty charges are outside the scope of VAT which is slightly different from being exempt. It means that the charge is not covered by VAT lesgislation at all whereas supplies of exempt supplies are dealt with somewhere. This is quite logical if you think about it as this really only applies to things for which it is really quite inconceivable that you would ever charge VAT such as court fines and, in this case, financial penalties charged by banks.

 

In a perverse way losing these cases may actually help the banks recover additional VAT. Because they charge VAT on most of the supplies they make, they can only recover a limited amount of the VAT on things they pay for. To calculate this they do a partial exemption calculation which looks at all of there supplies and calculates what proportion of their input VAT they can recover. At its simplest this is calculated by divdiing their standard rated supplies by the total of their standard rated and exempt supplies. If their exempt supplies fall because some of them are deemed to be penalty charges and therefore outside the scope of VAT then the proportion of the input VAT that they can recover actually increases!!

 

I would stress that is a very gerneralised view of how this works. Bank VAT is a highly complex area and if, for example, all bounced items fees were suddenly declared outside the scope, it's quite possible that this would increase VAT recovery for some banks and reduce it for others.

 

If the banks are knowingly treating these charges incorrectly for VAT purposes then they could be in some sort of trouble. However, the point is probably moot as it is unlikely to have a material impact on public funds.

[TheDebtor]

This topic was closed on 03/06/19.

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