It has been long established that bank interest is exempt from VAT and, for most businesses, should be excluded from any partial exemption calculations as being incidental to the core business.  

Since the introduction of the Flat Rate Scheme, HMRC have always been of the opinion that, irrespective of a businesses activities, any bank interest received is also subject to VAT using the relevant Flat Rate Scheme percentage.  This created an anomaly, as bank interest is normally treated as exempt from VAT, and is often disregarded for other VAT calculations as being passively earned – i.e. not earned as a result of any business aim or purpose. 

However following a decision by the First Teir Tribunal, in which The VAT Consultancy acted in a supportive role,  the tide has now turned. In the joined cases of Fanfield Engineering Limited and Thexton Training the Tribunal has determined that bank interest does not form part of the relevant turnover for the purposes of the Flat Rate Scheme calculations. 

This is a sensible conclusion, however, we would advise that businesses do not assume that all bank interest will be excluded from Flat Rate Scheme calculations. Businesses operating the Flat Rate Scheme should review the income included for the scheme calculations, and make sure that the appropriate rate is being applied. 

 If you would like further advice please contact Karen Mulcahy, karen.mulcahy@thevatconsultancy.com or call on 01962 735350