Revealed: Eight Vat-exempt financial services
Don't be fooled into thinking the rules for financial services only apply to banks! If your business performs any of the activities below, part of your activities will also be exempt. And since you can't claim input tax on expenses relating to exempt supplies, it's important to get this part of your Vat calculations right. Here are the eight financial services exempt from Vat...
Vat law specifies that certain financial services are exempt supplies for Vat purposes. But if you think this exemption only works in the interest of banks and other financial institutions, you're wrong.
And your assumption could cost you money! After all, you could be claiming an input tax credit that relates to exempt supplies.
To ensure there aren't any nasty surprises in store for you when you calculate your Vat and complete your VAT201 return, find out the other financial activities exempt from Vat to comply.
Here's a checklist of the eight financial services exempt from Vat
According to the Practical Vat Loose Leaf Service, the broad exemption for financial services includes the following activities:
The exchange of currency. This includes the obvious transactions that involve physical bank notes or coins, but also the crediting or debiting of accounts.
The issue, payment, or transfer of a cheque or letter of credit.
The issue, transfer of ownership or allotment of a debt security (i.e. any cession of a debt).
The issue or transfer of an equity or participatory security.
The provision of credit (including levying of interest).
The provision or reinsurance of a long-term insurance policy.
The provision of interest in a superannuation scheme.
The buying or selling of any derivative (includes all futures contracts and options contracts) or the granting of an option.
Note: While the actual buying or selling of a derivative is an exempt financial service, the underlying asset supplied will be subject to Vat.
Remember, exempt supplies are free of Vat. You can't claim any input tax relating to these. And this includes financial services. If you get this right, you'll be complaint with the Vat Act.