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HMRC internal manual

VAT Finance Manual

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HM Revenue & Customs
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Financial derivatives: other types of contracts

Interest rate swaps

Interest rate swaps are a form of dealing between banks and other financial institutions in which borrowers exchange fixed-interest rates for floating interest rates, or vice versa. Swaps can be in the same currency or different currencies.

For VAT purposes, during the term of the swap there is a continuous supply of services and, to the extent that any money changes hands, there is an exempt supply under Group 5, item 1. The party making the net payment is regarded as making a supply for no consideration (therefore, no supply for VAT purposes). This netting-off arrangement will involve only one supply and you should consult with Partial Exemption policy team, via the Financial & Commodities VAT UoE, if the trader has had any difficulties or has included the gross payments in its partial exemption special method.

Currency swaps

A currency swap is a transaction in which specified amounts of one currency are exchanged for another currency at a fixed price.

Like interest-rate swaps, for VAT purposes during the terms of the swap there is a continuous supply of services and, to the extent that any money changes hands, there is an exempt supply under Group 5, item 1.

The principal amounts of the underlying loans are exchanged at some point during the agreement. Thus while businesses use interest rate swaps to manage interest rate movements, currency swaps provide both a currency and interest hedge. For VAT purposes no supply takes place in relation to the exchange of principal amounts of underlying loans in currency swaps.

Contact the VAT Deductions and Financial Services Team, via the Financial & Commodities VAT UoE, if you have any queries about this area.