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HMRC internal manual

VAT Finance Manual

HM Revenue & Customs
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Money (including transfer of money) and related services: operation of a current, deposit or savings account: provision of ‘free’ banking services

The VAT treatment of the provision of ‘free’ banking services is important for partial exemption purposes.

Where a bank provides ‘free’ banking services in relation to either a current or deposit account it is, in fact, making an exempt item 8 supply for a consideration. This was established in The Governor and Company of the Bank of Scotland (tribunal decision 13854).

The tribunal stated:

[T]he Bank and the customer have a contractual relationship covering the setting up and maintenance of the [account] facility. The Bank agrees to open the account in the name of the customer, to accept deposits of cash, to repay to the customer any monies deposited to act as agent of the customer to pay sums of money to others, to issue cheque books and cards as appropriate etc. The customer agrees to abide by the terms governing the setting up of and maintenance of the facility and to pay such charges, if any, as the Bank may impose. Once the account is in credit (or debit) the legal relationship becomes that of debtor and creditor; and unless anything is agreed to the contrary the Bank, in common with bankers generally, has a general lien over securities etc. deposited by the customer. The provision of the ‘free’ banking facility can not … be severed from the debtor and creditor relationship that subsists when the … current account … is in operation. Whether one looks at the agreement for the current account facility or at the debtor and creditor relationship once the facility is used by the customer or at both there is a bilateral legal relationship under which both sides give consideration.

It is common ground that the Bank provides services for a consideration, so far as current accounts are concerned, when the Bank actually imposes a bank charge on the customer. The Commissioners accept this even where the charge imposed for the period is small … The dispute centres on the situation where the Bank either makes no charge because that was what was agreed at the outset or waives a charge that it would otherwise have been entitled to make. Whether the Bank charges for the current account facility or not, the nature of the Bank’s supplies is exactly the same. So far as the waiver of charges is concerned, I do not see this as removing the consideration for the supplies made by the Bank. The customer’s undertaking to pay such charges as may be imposed is a specific item of consideration given by him for the Bank’s services; it remains such whether enforced or waived. But the payment of bank charges, if demanded, is not the only ingredient in the consideration given by the customer under the legal relationship covering the current account facility. The customer gives non-monetary consideration by complying with the rules governing the current account and by, for example, handling the cheque book and bank card as directed. The customer gives monetary consideration when the current account facility is activated and cash is deposited; that consideration sustains the debtor and creditor relationship. With those features in mind … I conclude that the Bank does supply services for a consideration so far as current accounts are concerned. In the words of the definition of ‘service charge income’, I think that the provision of current account facilities is covered by the expression ‘all supplies’ even where no bank charges are imposed.

With deposit account facilities the conclusion must, in my view, be the same. There may be no cheque books and bank cards, but the agreement governing the opening of the deposit account facility is bilateral and the customer provides monetary consideration as soon as the deposit account is put in funds by him.