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2 bad-debt scenarios you need to know

by , 29 March 2016
As you already know, you can claim VAT back on debts which have been written off.

But don't get too carried away with that understanding!

Make sure you know these 2 scenarios first...


Do you know how to handle the VAT in these situations?

·         How to treat VAT you paid on bad debts;
·         Correctly charging VAT on the sale of a going concern; and
·         VAT and real estate/buildings/levies/transfer costs etc.

The ordinary VAT rules don't apply!
Here's what you need to know…
Scenario#1: Debtor pays the money back after you've recovered the VAT

If you write off a debt as 'bad' or irrevocable, and recover the VAT for it from SARS, and the debtor pays you later on, you must pay over the recovered VAT back to SARS.

You must include it, again, in the VAT return which covers the VAT period in which you recovered the amount.

Scenario#2: Ceding your debts

It's a fairly common practice for businesses to sell their list of debtors to agents or banks.

This is often done because those companies have struggled to recover the money from their debtors, and so would rather accept a smaller portion of the debt's value, instead of nothing at all, in order to give their cash flow a little extra boost, and from there on focus on new business.

But if you do this, remember there are VAT consequences…

In other words, if you're registered on an invoice basis for VAT, and you cede, or sell, your book debts, it's called a transfer of ownership of debts, which is a financial service! And when it comes to VAT, financial services are exempt.

And what often happens is that bad debts are sold to banks under a discounting agreement in which the bank pays less than the actual value of the debts, which leads to a loss on transfer of the debtors.

The amount which the bank gives to the vendor is a consideration for the exempt financial service. And what all this means is that you can't claim any input tax on the discounting costs.

*But also keep in mind that the way VAT is treated, for ceded debts, depends on the basis for cession…

To learn more on this, simply page over to Chapter B 02 in your Practical VAT Loose Leaf Service handbook, otherwise you can click here if you don't already have it.

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