Counter-intuitively and controversially, since the introduction of the VAT Flat Rate Scheme (FRS), HMRC had insisted that any bank interest earned by a business must be included as part of its income. Therefore, a business registered under the FRS effectively had to pay over VAT on its bank interest, even though bank interest is not generally VATable.
Following a recent case, they've changed their guidance. They now accept that interest doesn't have to be included in the income of a business when working out its FRS liability.
We've yet to see any guidance from HMRC on whether previously declared VAT on interest can now be recovered. It's unlikely that any business is massively out of pocket - especially with interest rates so low right now - but it might be worth considering a reclaim if you have been affected.
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