Value Added Tax The debt collection industry Presenter: Christo - - PowerPoint PPT Presentation

Value Added Tax

The debt collection industry

Presenter: Christo Theron Founder: TradeTaxPlus – Centre of Excellence Email address: christo.theron@tradetaxplus.com Mobile number: 083 283 7242 Website: www.tradetaxplus.com YouTube channel: Tradetaxplus

Agenda

• Session 1 - Framework of the VAT Act
• Session 2 - Legal framework: The credit industry
• Session 3 - Making the links
• Session 4 - The missing links

3

The debt collection industry

Value-Added Tax workshop

Session 1 Framework of the VAT Act

5

Value-Added Tax The legal framework

Basic principle

• Input tax and output tax are two fundamentally

different enquiries

• The fact that output tax is payable does not

mean that there is a consequential input tax deduction available to a third person

Topic 1 Output tax

7

Value-Added Tax Output tax

Basic rules

• Output tax is payable on the supply of any

goods or services by any person in the course

• f a VAT enterprise carried on by the person
• The recipient of a supply does not need to

be identifiable for the supply to be subject to VAT

8

Value-Added Tax Output tax

Basic rules (cont’d)

• Output tax is payable on the value of the supply
• Value of a supply = the consideration for the

supply

9

Value-Added Tax Output tax

Supply Goods or services For a consideration In a tax period

10

Definition of “supply” “Performance in terms of a sale, rental agreement, instalment credit agreement, and all other forms of supply , whether voluntary, compulsory or by

• peration of law ... and any derivative of “supply”

shall be construed accordingly.”

Value-Added Tax Output tax

Supply Goods or services For a consideration In a tax period

11

Meaning of “performance”

• There must be some positive act on the part of

the supplier

• Performance normally linked to the supply of

identifiable goods or services

• Consider deeming provisions

Value-Added Tax Output tax

Supply Goods or services For a consideration In a tax period

12

Definition of “services” “Anything done or to be done, including the granting, assignment, cession or surrender of any right or the making available of any facility or advantage”

Value-Added Tax Output tax

Supply Goods or services For a consideration In a tax period

13

Nature of services - Issues to consider

• Very wide definition
• Excludes a supply of money
• Fines
• Statutory fines
• Non-statutory fines with additional benefits
• Non-statutory fines with additional benefits

Value-Added Tax Output tax

Supply Goods or services For a consideration In a tax period

14

Definition of “consideration” “in relation to the supply of goods or services to any person, includes any payment made or to be made .... whether in money or otherwise, or any act or forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of any goods or services, by that person or by any other person ...”

Value-Added Tax Output tax

Supply Goods or services For a consideration In a tax period

15

Meaning of “consideration”

• Close nexus required between supply of goods
• r services and consideration for a supply
• Element of reciprocity required
• New Zealand principle
• Payments must be for a supply, not merely

relate to a supply

Value-Added Tax Output tax

Supply Goods or services For a consideration In a tax period

16

Meaning of “in respect of, in response to or for the inducement of the supply of services”

• Late payment fines fall into the above category

Value-Added Tax Output tax

Supply Goods or services For a consideration In a tax period

17

Time of supply rule

• Earlier of invoicing or payment
• Definition of “invoice”

“A document notifying an obligation to make payment”

Value-Added Tax Output tax

Supply Goods or services For a consideration In a tax period

18

Value-Added Tax Output tax

Supply Goods or services For a consideration In a tax period

Nature of an ”invoice”

• The obligation to make payment must be:
• Enforceable
• A present legal obligation
• May not be subject to a suspensive condition
• Only a contingent obligation
• Does not become an invoice once the

suspensive condition fulfilled

19

Value-Added Tax Output tax

Supply Goods or services For a consideration In a tax period

Nature of an ”invoice”

• Letter of demand is not an invoice for VAT purposes
• VAT liability (where applicable) will normally be

triggered by payment

Topic 2 Identification of potential categories

• f services

Identification of potential supplies

Application

Potential supply Supplier Recipient Time of supply Commission based recovery services Debt collector Credit provider Earlier of invoicing or payment Cost based recoveries Unknown Unknown Unknown

Topic 3 Input tax framework

23

Value-Added Tax Input tax

Basic principles

• Goods or services must be supplied to the vendor
• Recipient of a supply must be identifiable to claim

an input tax credit

• Input tax is claimed on the basis of a valid tax

invoice issued by the supplier to the recipient

24

Value-Added Tax Input tax

What does “supplied to the vendor” mean?

• The “Grandma’s Flowers” principle
• Legal recipient of goods or services may claim

input tax credit

• If creditor is not settled within 12 months from

date of supply, must repay input VAT to SARS

• Anomaly in the VAT Act where service is

paid for by a third person

• Section 72 ruling may be necessary

Identification of potential sources of input tax claims

Application

Potential supply Supplier Recipient Person entitled to input tax dedction Commission based recovery services Debt collector Credit provider Credit provider Cost based recoveries Unknown Unknown Unknown

Session 2 Debt collection legal framework

• The legal framework consists of:
• Primary legislation
• Secondary legislation
• Inter-party agreements

Elements of the legal framework

Debt collection legal framework

• Primary legislation
• The National Credit Act of 2005
• Debt Collectors Act 114 of 1998
• Secondary legislation
• Regulations to the Debt Collectors Act
• Regulation No. R. 185 – 7 February 2018
• Regulation No. R. 1141 – 27 October 2017

The governing statutes

Debt collection legal framework

The NCA:

• Regulates the relationship between the credit provider and the

debtor

• Regulates how much may be recovered by a debt collector from

a debtor

Purpose of the NCA

Debt collection legal framework

The NCA:

• Specific to the credit agreement:

“A credit agreement must not require payment by the consumer

• f any money or other consideration, except ... (f) default

administration charges, which ... May be imposed only if the consumer has defaulted on a payment obligation under the credit agreement, and only to the extent permitted by Part C of Chapter 6.”

Purpose of the NCA

Debt collection legal framework

Comment: Wording seems to suggest that NCA merely regulates the maximum amount that may be recovered from a debtor by a debt collector. It does not contain the charging/recovery authority to quantify and recover such amounts

• Proposed governing principle 1
• The NCA doen not provide the authority to the credit

provider to recover debt recovery costs from a debtor

• The debt collector in terms of the Debt Collectors Act has

the authority to recover regulated debt collection charges from defaulting debtors. The amount that is recoverable is governed by the Debt Collectors Act. The Credit provider

• nly has an oversight function to ensure that the amounts

recovered by the debt collector are within the prescribed limited set by the Debt Collection Act

Purpose of the NCA

Debt collection legal framework

The Debt Collectors Act

• Regulates the activities of the debt collection industry
• Specific to the recovery of money (Section 19):

“A debt collector shall not recover from a debtor any amount other than –

necessary expenses and fees prescribed by the Minister in the Gazette after consultation with the Council” “Upon request by a debtor ... The clerk of the magistrate’s court or a cost committee of a provincial law society may tax or assess any account or statement of costs, interest and payments claimed to be owed by a debtor to a debt collector or his or her client”.

Purpose of the Debt Collectors Act

Debt collection legal framework

Resolved issue The word “recover” used in the DCA is problematic as it does not clearly indicate whether the amounts recovered are recovered for the benefit of a third-party creditor, or whether in includes recoveries for its (the debt collector’s) own account. The workshop agreed that it includes both categories of recoveries.

Purpose of the Debt Collectors Act

Debt collection legal framework

• Proposed governing principle 2
• The Debt Collectors Act contains the operational mechanism

to recover amounts due to a credit provider as well as amounts due to the debt collector.

• The Debt Collection Act contains the levying power with

regards to the recovery of debt collection costs from a debtor by a debt collector. This power vests with the debt collector.

Purpose of the Debt Collectors Act

Debt collection legal framework

The credit agreement

• Formalises the specific contractual rights and obligations

between the credit provider and the debtor

• Confirms the right to recover debt recovery costs by a debt

collector from the debtor

Purpose of the credit agreement

Debt collection legal framework

• Proposed governing principle 3
• The credit agreement read with the requirements of the NCA

contain the record that allows debt collectors to recover regulated debt collectors costs from the debtor. The authority to recover the costs sits in the Debt Collections Act.

Purpose of the credit agreement

Debt collection legal framework

• The agreement
• Regulates the contractual rights and obligations between the

debt collector and the credit provider

• Generally deals with manner in which debt collector is

remunerated

• Commission on capital and interest recovered
• No responsibility for default administrative charges levied

by debt collector

• Hybrid of the above

Purpose of the agreement between the credit provider and the debt collector

Debt collection legal framework

• Proposed governing principle 4
• The agreement between the credit provider and the debt collector

regulates the contractual rights and obligations of each part with regards to the recovery of the debt by the debt collector, and how the debt collector is to be remunerated for its services.

• The agreement normally regulates the level of recovery of debt

collection fees that may be recovered by the debt collector from a

• debtor. The legal authority for the recovery sits in the Debt

Collection Act.

Purpose of the agreement between the credit provider and the debt collector

Debt collection legal framework

Session 3 Completing the puzzle

• Governing principles
• The regulated debt recovery charges can only accrue to the

debt collector, being the only person legally entitled to charge and recover the costs from the debtor

• The question for consideration is whether the recovery

represents consideration for a taxable supply of a service on which the Debt Collector must account for output tax

Analysis and deductions

Completing the puzzle

• Governing principles
• The charge by the debt collector to the credit provider for

costs incurred if the debtor pays the amount directly to to the credit provider, will be a recovery of money from the Credit Provider and will not be subject to VAT in the hands of the debt collector.

Analysis and deductions

Completing the puzzle

• Governing principles
• Commission charged by a debt collector to a credit provider

will be subject to VAT.

• The debt collector will be required to issue a tax invoice to

the credit provider and account for the output tax to SARS.

• The credit provider will be entitled to an input tax deduction

in respect of the charge by the debt collector.

Analysis and deductions

Completing the puzzle

Summary of cash flows

Completing the puzzle

Ledger accounts for debt collector Debit Credit Debtor 115 Sales 100 VAT 15 Charges to debtor for recovery of debt collection costs

Summary of cash flows

Completing the puzzle

SARS’ position Debit Output tax – Credit provider Input tax – credit provider – Charge by debt collector (0) Output tax – Debt collector 15 Input tax - Debtor (15) Net value added in supply chain Nil

• Governing principles
• If the charge for the default administration costs cannot be

held to be for a supply of goods or services, there are two possible scenarios:

• The recovery is a recovery of money;
• The recovery is made in terms of a contract of insurance

Analysis and deductions (cont’d)

Completing the puzzle

• Recovery of money
• No output tax payable by the debt collector
• Debt collector may need to make an input tax adjustment in

respect of activities relating to the recovery of the debt collection costs

• Apportionment

Analysis and deductions (cont’d)

Completing the puzzle

Summary of cash flows

Completing the puzzle

Ledger accounts for debt collector Debit Credit Debtor 100 Sales 100 VAT 00 Recovery of debt collection costs from debtor

Summary of cash flows

Completing the puzzle

SARS’ position Debit Output tax – Credit provider Input tax – Credit provider – Charge by debt collector Output tax – Debt collector Input tax - Debtor Net value added in supply chain R0

• Recovery in terms of a contract of insurance
• No output tax payable on the recovery by the debt collector if

the debtor is not VAT registered

• Output tax payable on the recovery by the debt collector if

the debtor is VAT registered

Analysis and deductions (cont’d)

Completing the puzzle

Summary of cash flows – Debtor is not a VAT vendor

Completing the puzzle

Ledger accounts for debt collector Debit Credit Debtor 100 Sales 100 VAT 00 Recovery of debt collection costs from debtor

Summary of cash flows - Debtor is not a VAT vendor

Completing the puzzle

SARS’ position Debit Output tax – Credit provider Input tax – Credit provider – Charge by debt collector Output tax – Debt collector Input tax - Debtor Net value added in supply chain R0

Summary of cash flows – Debtor is a VAT vendor

Completing the puzzle

Ledger accounts for debt collector Debit Credit Debtor 115 Sales 100 VAT 15 Charges to debtor for recovery of debt collection costs

Summary of cash flows – Debtor is a VAT vendor

Completing the puzzle

SARS’ position Debit Output tax – Credit provider Input tax – credit provider – Charge by debt collector (0) Output tax – Debt collector 15 Input tax – Debtor (deduction) (15) Net value added in supply chain Nil

What is next?