The real impact of the VAT exemption on EU banks

The VAT exemption which applies to European banks does not lead to a tax advantage for the banking sector. If bank services were subject to VAT in place of the current exemption system, this would not lead to any significant increase in EU VAT revenues.

The new report, “How the VAT exemptions impact the banking sector” by Professor Ben Lockwood of the University of Warwick and PwC, describes in detail why the VAT exemption applying to banks does not lead to a tax advantage for banks. Under the current VAT exemption system, banks do not charge their customers VAT, but in return they cannot recover VAT on costs they incur. In the report, this irrecoverable VAT is estimated to amount to up to €33 billion per annum.

The research concludes that if bank services were subject to VAT in place of the current exemption system, this in fact wouldn’t lead to any significant increase in EU VAT revenues.