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HMRC internal manual

VAT Finance Manual

Securities and related services: stock lending

When a business obtains/borrows securities from another business to fulfil a stock transaction that it is committed to, this is known as stock lending. The borrower agrees to return an equivalent number of the same securities at a later date.

The borrower in this scenario holds legal title to the stocks while they are on loan to them and will receive the dividends. As mentioned in VATFIN4250, dividends are outside the scope of VAT as they are not consideration for a supply.

Stock-lending is an exempt supply under item 6, the consideration being the fee charged to the borrower. Although see VATFIN4250 when dealing with issues.

When the borrower repays the lender there is no supply for VAT purposes.

It is common for stock-lending deals to have secondary supplies of interest. These occur where the borrower provides collateral, e.g. cash, interest-bearing securities, certificates of deposit (CDs), as default security.

If the lender temporarily invests the cash collateral in interest-earning deposits or interest-bearing securities, there will be additional exempt supplies to account for (subject to VATFIN4250). Similarly, the interest received on interest-bearing securities or CDs, used as collateral, constitutes the consideration for further exempt supplies.

It is possible that as part of the stock lending agreement the interest on the CDs etc may be shared by both borrower and lender (i.e. the borrower has a further exempt supply here).

If the ‘borrower’ defaults and the ‘lender’ retains all or part of the cash collateral then the amount retained is compensation and outside the scope of VAT. Any part of the collateral returned to a defaulted borrower is also outside the scope of VAT, as the payment is not consideration for any supply.