Credit, debts and related services: credit and related services: personal loans, cash loans, overdrafts, mortgages and interest on deposit
Item 2 covers most of the normal types of credit transactions you are likely to encounter, for example, loans, overdrafts and other forms of advances.
Consideration for an item 2 supply is whatever is received over and above the initial amount loaned, and is normally expressed as ‘interest’, but in certain circumstances it can be expressed in different terms. (See VATFIN3120 for interest-free credit.)
Sometimes there is an arrangement fee or other type of fee charged. These might represent consideration for the supply of the loan, advance or credit, but you should see VATFIN3125.
Personal and cash loans
As above, the consideration received for a personal or cash loan will be exempt, and does not include the amount of the capital loaned.
Many banks and building societies allow their customers to go overdrawn on their bank accounts, in effect borrowing money using a loan on demand. For this facility the bank will normally charge the customer. This charge is seen as consideration for the supply of credit, and thus is exempt under item 2.
Interest paid on deposits with a bank or building society is also consideration for the making of an advance - the advance being made by the customer of the bank.
Mortgages (personal and commercial)
Someone wishing to purchase property may obtain finance by taking out a mortgage loan, which is secured by means of a legal mortgage (commonly referred to as a legal charge) over the property. The lender (or ‘mortgagee’) is not purchasing the property and there is no supply of a security by the borrower (or ‘mortgagor’) to the lender.
The lender is making an exempt supply of credit to the borrower and the consideration is the interest charged.