Value Added Tax. The debt collection industry

Transcription

1 Value Added Tax The debt collection industry Presenter: Christo Theron Founder: TradeTaxPlus Centre of Excellence address: Mobile number: Website: YouTube channel: Tradetaxplus

2 The debt collection industry Value-Added Tax workshop 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

3 Session 1 Framework of the VAT Act

4 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 5

5 Topic 1 Output tax

6 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 of 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 7

7 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 8

8 Value-Added Tax Output tax Supply Goods or services For a consideration In a tax period 9

9 Value-Added Tax Output tax 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 operation of law... and any derivative of supply shall be construed accordingly. Supply Goods or services For a consideration In a tax period 10

10 Value-Added Tax Output tax 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 Supply Goods or services For a consideration In a tax period 11

11 Value-Added Tax Output tax 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 Supply Goods or services For a consideration In a tax period 12

12 Value-Added Tax Output tax 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 Supply Goods or services For a consideration In a tax period 13

13 Value-Added Tax Output tax 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... Supply Goods or services For a consideration In a tax period 14

14 Value-Added Tax Output tax Meaning of consideration Close nexus required between supply of goods or 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 Supply Goods or services For a consideration In a tax period 15

15 Value-Added Tax Output tax 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 Supply Goods or services For a consideration In a tax period 16

16 Value-Added Tax Output tax Time of supply rule Earlier of invoicing or payment Definition of invoice A document notifying an obligation to make payment Supply Goods or services For a consideration In a tax period 17

17 Value-Added Tax Output tax 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 Supply Goods or services For a consideration In a tax period 18

18 Value-Added Tax Output tax Nature of an invoice Letter of demand is not an invoice for VAT purposes VAT liability (where applicable) will normally be triggered by payment Supply Goods or services For a consideration In a tax period 19

19 Topic 2 Identification of potential categories of services

20 Application Identification of potential supplies 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

21 Topic 3 Input tax framework

22 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 23

23 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 24

24 Application Identification of potential sources of input tax claims 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

25 Session 2 Debt collection legal framework

26 Debt collection legal framework Elements of the legal framework The legal framework consists of: Primary legislation Secondary legislation Inter-party agreements

27 Debt collection legal framework The governing statutes 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 February 2018 Regulation No. R October 2017

28 Debt collection legal framework Purpose of the NCA 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

29 Debt collection legal framework Purpose of the NCA The NCA: Specific to the credit agreement: A credit agreement must not require payment by the consumer of 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. 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

30 Debt collection legal framework Purpose of the NCA 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 only 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

31 Debt collection legal framework Purpose of the Debt Collectors Act 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.

32 Debt collection legal framework Purpose of the Debt Collectors Act 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.

33 Debt collection legal framework Purpose of the Debt Collectors Act 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.

34 Debt collection legal framework Purpose of the credit agreement 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

35 Debt collection legal framework Purpose of the credit agreement 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.

36 Debt collection legal framework Purpose of the agreement between the credit provider and the debt collector 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

37 Debt collection legal framework Purpose of the agreement between the credit provider and the debt collector 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.

38 Session 3 Completing the puzzle

39 Completing the puzzle Analysis and deductions 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

40 Completing the puzzle Analysis and deductions 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.

41 Completing the puzzle Analysis and deductions 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.

42 Completing the puzzle Summary of cash flows Ledger accounts for debt collector Debit Credit Debtor 115 Sales 100 VAT 15 Charges to debtor for recovery of debt collection costs

43 Completing the puzzle Summary of cash flows SARS position Debit Output tax Credit provider 0 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

44 Completing the puzzle Analysis and deductions (cont d) 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

45 Completing the puzzle Analysis and deductions (cont d) 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

46 Completing the puzzle Summary of cash flows Ledger accounts for debt collector Debit Credit Debtor 100 Sales 100 VAT 00 Recovery of debt collection costs from debtor

47 Completing the puzzle Summary of cash flows SARS position Debit Output tax Credit provider 0 Input tax Credit provider Charge by debt collector 0 Output tax Debt collector 0 Input tax - Debtor 0 Net value added in supply chain R0

48 Completing the puzzle Analysis and deductions (cont d) 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

49 Completing the puzzle Summary of cash flows Debtor is not a VAT vendor Ledger accounts for debt collector Debit Credit Debtor 100 Sales 100 VAT 00 Recovery of debt collection costs from debtor

50 Completing the puzzle Summary of cash flows - Debtor is not a VAT vendor SARS position Debit Output tax Credit provider 0 Input tax Credit provider Charge by debt collector 0 Output tax Debt collector 0 Input tax - Debtor 0 Net value added in supply chain R0

51 Completing the puzzle Summary of cash flows Debtor is a VAT vendor Ledger accounts for debt collector Debit Credit Debtor 115 Sales 100 VAT 15 Charges to debtor for recovery of debt collection costs

52 Completing the puzzle Summary of cash flows Debtor is a VAT vendor SARS position Debit Output tax Credit provider 0 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

53 What is next?