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The VAT implications of the sale of book debts written off
- 06 May 2020
- VAT
- Gerhard Badenhorst
Monday, 12 June 2017
Important:
This article is based on tax law for the tax year ending 28 February 2018.
Author: Gerhard Badenhorst
When a vendor, which is registered for value added tax (VAT) on the invoice basis, has made a taxable supply on credit, the vendor is generally required to account for the VAT on the value of the supply when a tax invoice for the supply is issued. If the vendor is unable to recover the debt, then s22(1) of the Value Added Tax Act, No 89 of 1991 (VAT Act) provides relief to the vendor by allowing for a deduction of the VAT previously accounted for, when the debt is written off as irrecoverable.
It often happens that the vendor then sells these book debts that have been written off to specialised debt collectors in an attempt to recover at least a portion of the losses suffered as a result of the non-payment by the debtors. The question that often arises is whether there are any consequences for the vendor regarding the sale of such book debts.
The book debts are generally sold to a debt collector on a non-recourse basis for amounts which are substantially less than the amounts owing. Proviso (iv)(aa) to s22(1) of the VAT Act, prohibits the claiming of a deduction for VAT on the transfer of accounts receivable at face value on a non-recourse basis. According to the Explanatory Memorandum to the Taxation Laws Amendment Bill, 1997 (Explanatory Memorandum), the purpose of proviso (iv) to s22(1) was to prohibit a deduction of the difference between the face value and the consideration for accounts receivable upon transfer thereof. This is because such discount is not considered to be an irrecoverable debt as contemplated by s22(1), but a financing cost.
The Explanatory Memorandum stipulates further that the ‘face value’ of a debt transferred is, for the purpose of s22(1), the net value of the account receivable at time of transfer, after adjustments have been made for debit and credit notes and after bad debts are already written off by the vendor. Therefore, if the special meaning to the term ‘face value’, as attributed by the Explanatory Memorandum is applied, then the accounts receivable, which have been written off as irrecoverable by the vendor, are transferred for a consideration greater than their face value, and not at a discount. Therefore, there is in any event no amount that could qualify as a deduction in these circumstances.
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This article first appeared on cliffedekkerhofmeyr.com.