Financial services and the VAT exemption

Most core financial services are exempt from VAT under Group 5 of Schedule 9 to the VAT Act 1994: dealing in money, lending, operating bank accounts, dealing in shares and bonds, managing certain investment and pension funds, and acting as an intermediary in those transactions. Exemption depends on what the service is, not on who buys it, so advice, debt collection and back office work for a bank are usually taxable. The price of exemption is that VAT on related costs is generally irrecoverable, unless the customer belongs outside the UK.

Which financial services are exempt?

Group 5 lists the exempt transactions item by item. In summary:

The notes refine these. Note (1A) takes services that are merely preparatory to an item 1 transaction out of the exemption. Note (2) excludes coins and banknotes supplied as collectors’ pieces or investment articles. Note (4) brings in supplies by a card operator to the retailer that accepts the card. Note (3) confirms that credit supplied by a seller alongside its own goods or services is exempt if a separate charge is made and disclosed.

Which finance related services are not exempt?

HMRC’s VAT Notice 701/49, paragraph 1.6, lists services that are connected with finance but taxable, including bookkeeping, debt collection and credit control, equipment leasing, executor and trustee services, investment, finance and tax advice, management consultancy, merger and takeover advice, portfolio management (other than fund management within item 9), registrar services and safe custody.

Three distinctions cause most of the disputes:

• Outsourced services. A service supplied to a bank does not become exempt because the bank uses it in its own exempt business. To be exempt it must, viewed broadly, form a distinct whole that fulfils the essential functions of an exempt transaction (paragraph 1.8).
• Credit management. Managing credit is exempt only for the person who granted it. A third party carrying out credit checks, valuations, credit decisions or record keeping for a lender makes a taxable supply (paragraph 4.10).
• Debt collection. Collecting debts for a creditor is taxable, even if it involves some negotiation with the debtor (paragraph 5.10).

Some charges that look financial are not supplies at all. A late payment penalty imposed by a supplier that had not agreed to defer payment is outside the scope of VAT, as is a supplier’s charge to recover the cost of a dishonoured cheque. By contrast, an extra charge for agreeing to defer payment beyond the time of supply is consideration for exempt credit (paragraphs 2.11, 4.4 and 4.5). A personal contract purchase whose final optional payment is set at or above the asset’s expected market value is treated as leasing, so there is no exempt credit element at all.

How does the intermediary exemption work?

Note (5) defines intermediary services as bringing together people seeking financial services and people who provide them, together with, for items 1 to 4, work preparatory to the conclusion of the contract. It expressly excludes market research, product design, advertising, promotional or similar services, and collecting and providing information for those activities. Note (5A) requires the person to be acting in an intermediary capacity between the provider and the customer.

Notice 701/49, section 9, explains that preparatory work means specialised work such as helping to set the contract terms or making representations for a client, not clerical formalities. The service remains exempt if the transaction is never completed, and more than one intermediary in a chain can qualify. For securities, introducing a buyer to an issuer is exempt even without preparatory work.

Financial advisers are the classic borderline. Advice alone is taxable. Where advice directly results in the client taking out a product and the adviser meets the intermediary conditions, the whole service, including the advice, is exempt, and commission from the provider is consideration for an exempt intermediary supply. Where the advice far outweighs the arranging, such as a broad financial review that ends in a minor product, the whole supply is taxable (paragraph 9.9). Insurance broking has its own exemption in Group 2 of Schedule 9 and is not covered here.

How does exemption affect input tax recovery?

A business can deduct input tax used for taxable supplies, but not input tax relating to exempt supplies. Where costs relate to both, it recovers only the taxable share under the partial exemption rules in VAT Notice 706 (Notice 701/49, paragraph 1.9). Under the de minimis rule in Notice 706, paragraph 11.2, a partly exempt business can treat itself as fully taxable if its exempt input tax is not more than £625 per month on average and not more than half of its total input tax. Both conditions must be met. Incidental financial transactions, such as interest earned on a business bank account, are left out of the standard method calculation altogether.

Exports are the main exception. Article 3 of the Value Added Tax (Input Tax) (Specified Supplies) Order 1999 allows recovery of input tax on services that would be exempt under Group 2, or under items 1 to 6 and item 8 of Group 5, where they are supplied to a person belonging outside the United Kingdom, are directly linked to an export of goods outside the United Kingdom, or are intermediary services in relation to either. HMRC’s transitional guidance confirms that, from 11pm on 31 December 2020, this extended to customers belonging in the EU, and that specified supplies are treated as taxable for partial exemption purposes. Fund management under items 9 and 10 is not on that list. The relevant paragraphs of Notice 701/49 were last revised in 2019 and still describe the earlier EU position, so the Order is the reliable reference.

What does this look like in numbers?

Illustration only. A UK mortgage and protection firm earns £200,000 of commission from UK lenders for exempt intermediary services and £50,000 of fees for advice only work, which is taxable. In a year it incurs £1,000 of VAT on costs used only for the advice work, £2,000 on costs used only for arranging mortgages, and £5,000 on shared overheads.

The exempt input tax averages £500 a month, which is under £625, but it is three quarters of total input tax of £8,000, so the second de minimis condition fails and the £6,000 stays irrecoverable.

What about fund and pension scheme management?

Item 9 exempts the management of authorised open ended investment companies, authorised contractual schemes, authorised unit trusts, certain Gibraltar and individually recognised overseas schemes, and, from 1 April 2020, qualifying pension funds. Note (6) defines a qualifying pension fund as one that is solely funded, directly or indirectly, by its members; where the members bear the investment risk; that pools the contributions of more than one member; that spreads risk over a range of investments; and that is established in the United Kingdom. Item 10 adds the management of closed ended collective investment undertakings, which must, among other conditions, have all ordinary shares on the official list and admitted to trading on a UK regulated market. Managing a private client’s portfolio falls outside both items and is taxable.

What mistakes come up most often?

• Assuming that work for a bank, lender or fund is exempt because the customer is.
• Treating standalone advice fees as exempt simply because the adviser also earns exempt commission.
• Including incidental bank interest in the partial exemption calculation, which understates recovery.
• Missing the input tax recovery available for exempt finance supplied to customers belonging outside the UK, or claiming it for fund management where it does not apply.
• Overlooking that exempt income counts against VAT recovery for a whole VAT group, since the de minimis limit applies to the group as a whole.

For how exemption differs from the zero rate, see zero rated vs exempt supplies. Holding companies that mainly receive dividends and interest face similar recovery questions, covered in VAT and holding companies.

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Sources

• legislation.gov.uk: Act 1994 c. 23, schedule 9
• GOV.UK: Vat notice 70149 finance
• GOV.UK: Partial exemption vat notice 706
• legislation.gov.uk: SI 1999/3121, article 3
• GOV.UK: Transitional guidance for vat specified supplies

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.