How is bank interest treated under the VAT flat rate scheme?
This is a freeview 'At a glance' guide to bank interest and the VAT flat rate scheme.
Bank interest is not to be included in the turnover used to calculate the VAT due by a business using the Flat Rate scheme. Interest is outside the scope of VAT.
This change follows the decision in Fanfield Limited & Thexton Training Limited v HMRC  TC00919 (11 January 2011).
Amendment of VAT Notice 733 dealing with the Flat Rate Scheme
VAT Notice 733 was amended following the decision.
The CIOT’s action points
The CIOT made the comment that the highest rate of VAT payable under the flat rate scheme is 13.5% (editorial note, that was at the time of this case, it is now higher at 16.5%). Accordingly, the amounts at risk may be quite small e.g. the tax saved on £100 interest not included would be £13.50, not a lot given that £100 is the interest on savings of up to about £10,000 [at the time]. Nevertheless, members may wish to consider whether to inform their clients and, if they make use of the scheme themselves, check that they are applying it correctly in light of the change.
Useful guides on this topic
Flat rate scheme
What is the VAT Flat Rate Scheme (FRS)? Who can apply? How do you apply? What are the rules? What are the rules for capital expenditure and pre-registration VAT?
Flat rate scheme: Farmers
What is the agricultural flat rate scheme? Who can use it? What are the conditions? What is the benefit? What about non-farming income?
Flat Rate Scheme: Limited cost trader
From 1 April 2017 a new category of trader, a ‘limited cost trader’, with a Flat Rate Scheme (FRS) percentage of 16.5% applies to FRS users.
Leaving the Flat Rate Scheme
A step-by-step guide to leaving the VAT Flat Rate Scheme (FRS).