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Financial services: Be wary when dealing with the cession and discounting of debts!

by , 21 January 2014
Are you involved in the supply of financial services? If so, read on to find out why you must tread carefully when it comes to the cession and discounting of debts.

If you supply financial services, make sure you consider the following when it comes to the cession and discounting of debts…

Consider this when it comes to the cession of debts

The Practical Vat Loose Leaf Service explains that it's a common business practice for companies to sell their outstanding debtors list to collection agents or banks.

In most cases, the reason for this is because they've struggled to recover the money from their debtors, and would rather accept a proportion of the value of the debts, boost their cash flow and concentrate on new business.

That said; if you're considering this as an option for resolving the ongoing problem of your list of old and stale debtors, you must be aware of a hidden pitfall that you may fall into if you aren't wary.

Caution! If you're registered for Vat on the invoice basis, and cede or sell your book debts, it's known as a transfer of ownership of debts. This is a financial service.

Often, debts are ceded to a bank under a discounting agreement. The amount received by the vendor from the bank is the consideration for the exempt financial service.

This real life financial service example will help explain this concept

Let's say, Miss Kathrada is registered for Vat on the invoice basis.

She has difficulty managing her past-due debtors and cedes her debtors (with a book value of R100 000) to Big Business Commercial Bank. The bank pays R80 000 for the debtors. The R80 000 thus constitutes consideration for the exempt supply.

When Miss Kathrada completes her Vat return for the tax period in which she ceded her debtors list, she declares the R80 000 as an exempt supply in Block 3 of her Vat return. The R20 000 difference is known as a discounting or factoring cost and is also an exempt supply for Vat purposes.

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

To avoid penalties, be sure to consider the cession and discounting of debts if you supply financial services.

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