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Don't fall into this pitfall when dealing with the cessation and discounting of debts!

by , 08 December 2015
It's a very common business practice for companies to sell their outstanding-debtors list to a collection agent or a bank.

Very often, this is done because the companies have had great difficulty in trying to recover the money from their debtors, and so would rather accept a proportion of the debt's value in order to give their cash flow a boost and focus on new business.

But that if you're considering this as an option in resolving any problems with old debtors, you could fall into a pitfall, which will be discussed below, if you're not wary.

So read on...

Comparative Example:

Mr. Rogers is registered for VAT on an invoice basis, and he has great difficulty managing his past-due debtors and so cedes them with a book value of R100 000.

He does so to ABC Bank, which pays R80 000 for the debtors.

Read on to see more…


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Article continued…

The R80 000 will therefore be part of the consideration for the exempt supply.

When Mr. Rogers completes his VAT return for the tax period in which he ceded his list of debtors, he declares the R80 000 as an exempt supply in his VAT return. The R20 000 is considered a discounting factor which is also an exempt supply for VAT purposes.

What's the pitfall?

If you're registered for VAT on a payments basis, then the cession or sale of your book debts is NOT an exempt supply, and so you'll have to account for VAT at the 14% rate for the cession or sale of any book debts. 

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