4 Bases you have to know when ceding bad debts
When it comes to bad debts, sometimes businesses cede them, meaning they sell and transfer their debts, to agents or banks, for an amount less than the value of the debts. They do this in order to something out of the bad debt, instead of nothing.
But knowing how to deal with VAT, when it comes to ceding debts, can get very confusing. This is because there are various bases on which the cession can be made.
So to help you, here are the 4 different bases on which debt can be ceded, along with key points you should know about them...
Basis#1: Vendors registered for VAT on an invoice basis and who cede their debts on a recourse basis
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…
The cession of your debts is an exempt supply.
You can't claim any input VAT for the discounting cost.
If the entity which buys your debt can only collect a portion of it, you may claim an input tax deduction on the portion which is irrevocable.
Basis#2: Vendors who are registered for VAT on an invoice basis and who cede their debts on a non-recourse basis
The cession of your debt is an exempt supply.
You can't claim any input VAT on the discounting cost.
If the buyer of the debt only collects a portion of the debt, then she (the buyer that is) is entitled to an input tax deduction on the irrevocable portion.
Basis#3: Vendors registered for VAT according to the payment basis and who cede their debts on a non-recourse basis
You must account for VAT if you cede you debts and you'll have to pay over the output VAT, which is calculated by using the fraction 14/114 X the amount you received for your debts
The buyer of the debts isn't entitled to an input tax deduction as she didn't provide the original taxable supply that created the debt.
You're now beginning to gain a clearer picture here. But there's still one more basis you should know of…
So head over to Chapter B 02
in your Practical VAT Loose Leaf Service
handbook to see what it is.
If you don't already have this brilliant VAT resource, simply click here.
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