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HMRC internal manual

VAT Valuation Manual

Specific applications: apportionment and valuation of membership benefits: compulsory loans with minimal interest

Occasionally a club may require its members to make a loan to it and will pay interest at a rate determined arbitrarily or by reference to a rate other than the base-lending rate - the Retail Price Index for example. In these cases, you must consider the difference between the interest rate used and what would have been paid using the base-lending rate. If the rate is so low that it is “commercially unrealistic”, you should perform the calculation described in VATVAL11540, deduct the interest actually paid from that figure and then apply the VAT fraction to the remainder. This results in taxing the value of the benefit gained by the club from borrowing the money from this subsidised source.

Whether the above calculation need be performed is, however, a question of degree in each case: if the difference between the rate of interest paid by the club and the base-lending rate is negligible, it will not be necessary.