VAT implications of On-line Banking products

It is possible to reduce irrecoverable VAT costs for a banking products organisation by structuring an on-line arrangement whereby the service provider is based in a non-EU country. The service provider can make exempt financial supplies to customers in the UK. The services going out to the non-EU service provider (e.g. telecom or software costs) will be outside the scope of UK VAT, but with the right to deduct input VAT.

Therefore, potentially there are opportunities for non-financial entities also to structure such arrangements to facilitate a more competitive service. However, care should be taken regarding “agency” issues, which could flag up potential VAT liabilities.