Running a financial services business? Not all of your services are VAT-exempt
I run a financial services business — is everything I do VAT-exempt, or only some of it?
A common assumption among financial-sector businesses is that "financial services" as a category are exempt from VAT across the board — and that isn't accurate. The law draws the line based on how the return itself is generated: if it comes from a margin or spread, it falls under the exemption; if it comes from an explicit fee or commission agreed upfront, it's subject to the standard 5% rate. The same institution can issue two invoices on the same day where one is exempt and the other is taxable, depending entirely on what each line item represents.
Among the key exempt services: interest or profit rates on loans, mortgages, and credit facilities; foreign exchange spreads on currency trading; life insurance contracts and related reinsurance; the issuance of shares, bonds, and debt instruments; and operating current and savings accounts, as long as there's no explicit fee attached.
By contrast, any line item carrying an explicit fee or commission is standard-rated, even when issued by the same institution alongside other exempt services. Examples include annual credit card fees and late-payment charges, safe-custody fees for securities, financial advisory and portfolio management fees, brokerage commissions, and arrangement fees for structuring a financing deal. General insurance — motor, property, health — is fully standard-rated too, unlike life insurance.
Islamic finance is treated under exactly the same logic through the tax-neutrality principle: the profit rate in structures like Murabaha, Ijara, and Musharaka is treated the same as conventional interest, provided the contract structure achieves the same economic outcome — there's no separate treatment between the two systems.
The real difficulty shows up at institutions running both types side by side — a bank or finance company earning exempt interest on its loan book while also charging taxable advisory or management fees. In that setup, input VAT recovery isn't automatic or full; it has to be apportioned between the taxable and exempt activity, which requires each revenue line to be classified precisely from the start for the recovery ratio to come out right.
RASEEKH reviews your revenue lines when your business sits in the financial sector, to make sure each one is correctly classified from the outset and that the recovery ratio you're applying actually reflects your real activity mix.