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VAT and the Debt Collection Industry
Memo from ADRA
ADRA has for several months been confronted with the extremely sensitive issue of how Value Added Tax on Annexure B fees and expenses are managed by debt collectors. The issue was forced to the forefront by a tax advisory company who approached prominent credit provides with advice and assistance in terms whereof clients of debt collectors could reclaim from SARS the VAT paid by debtors to debt collectors on Annexure B fees and expenses as their own input VAT. In terms of tax legislation, such credits could be claimed for the past 5 years wherefore the current claims and potential future claims are substantial.
This proposition is based on a perceived anomaly in the Value Added Tax Act and ostensibly backed by legal opinion from two leading law firms. Their argument is that the entity who is entitled to claim this input VAT benefit is the entity to whom the debt collectors provides a “taxable supply” (or service). As the service is rendered to the client and as no service is rendered to the debtor who pays the VAT on Annexure B fees and expenses, it is the client who is entitled to this input tax credit.
Several prominent clients of debt collection firms acted on this advice. They compel debt collectors to either provide them with VAT invoices for all Annexure B fees and expenses paid by debtors or request such data together with the debt collectors consent allow the creditor to apply self-invoicing for such VAT transactions.
ADRA engaged with the tax advisory firm and credit providers who adopted this approach. There was an underlying threat that, on a plain reading of the VAT Act, VAT is payable by debt collectors upon invoice or demand to the debtor, whichever is the soonest. Being compelled to pay the output VAT on all Annexure B fees and expenses over to SARS when they raise the fee and demand payment thereof from a debtor (as opposed to when the debtor pays the fees and expenses) will created a very substantial cash outlay which members might well not be able to absorb. In most instances the Annexure B fees are never paid by the debtor and the debt collector can only claim the credit back from SARS once that debt is eventually written off as irrecoverable. Where the Annexure B fees and expenses is in fact paid by the debtor, it is in the norm paid only once the capital and interest is paid in full and can be several months or even years after the output tax becomes payable to SARS on the view expressed above.
The underlying threat was that, if this interpretation was correct, debt collectors who pay VAT on Annexure B fees and expenses over to SARS only upon receipt of payment thereof by debtors will be exposed to investigation and prosecution by SARS and will be compelled to retrospectively correct their incorrect reporting and short payments to SARS etc.
Partly due to the risk the industry was exposed to, ADRA did not publicize this industry challenge. ADRA embarked on an extensive exercise to obtain its own opinion/s on the topic and managed the exposure of members on an ad hoc basis as members reported it to ADRA.
ADRA secured the services of Mr. Christo Theron, a leading and acclaimed VAT expert and the chairperson of the VAT Committee of the South African Institute of Chartered Accountants. Following thorough research, Mr. Theron provided ADRA with his professional opinion which is annexed hereto for the benefit of all members and the wider credit industry.
In-essence it is Mr. Theron’s professional and researched opinion that:
VAT is payable by debtors on Annexure B fees and expenses.
Take note that an equally plausible argument exist that VAT is in fact not payable by debtors on Annexure B fees.
The debtor (and not the client on whose behalf the capital and interest are recovered) is entitled to claim the input VAT benefit.
Unless the debt collector issues a debtor with a proper VAT invoice for Annexure B fees and expenses prior to payment thereof by the debtor, the debt collector only becomes liable to pay output VAT on Annexure B fees and expenses raised once the debtor waivers all remedies to challenge either his/her liability to pay such fees and expenses or the quantum of such fees and expenses. For as long as the debtor retains a remedy, such as to dispute liability to pay such fees and expenses or to have such bill for fees and expenses assessed or taxed as provided for in the Debt Collectors Act, the liability to report and pay such output tax to SARS is not triggered. In the norm, the waiver of such remedies is implied by actual payment of the Annexure B fees and expenses to the debt collector.
Should a debt collector assist a client in wrongfully claiming the benefit of input VAT on Annexure B fees and expenses from SARS, for example by providing the client with VAT invoices for such Annexure B fees and expenses or consent to the client applying self-invoicing for such Annexure B fees and expenses, the debt collector is complicit in such unlawful conduct and exposed to sanction by SARS, including criminal prosecution.
A debt collector may however be contractually bound to provide a client with all data on money recovered, including data of Annexure B fees and expenses and the VAT portion thereof recovered from debtors. Similarly, in terms of the National Credit Act a debt collector may be compelled to provide all such data to the credit provider. If the data is not provided in the form of a document which constitutes a VAT invoice or a consent to the client applying self-invoicing, the debt collector acts lawfully in providing such data only to its clients.
Mr. Gerhard Badenhorst, the author of the “opinions” used in support of the proposition that credit providers are entitled to the input VAT credit provided ADRA with a letter confirming the context of those documents. His letter dated 31 July 2018 is annexed hereto. Although he differs from Mr. Theron on the question whether VAT is payable by consumers on all Annexure B fees and expenses, he supports the opinion that credit providers are not entitled to the input VAT credit.
Take note that, as is evident from the opinion, VAT is a very complex topic. There is also an alternative and plausible argument on the question whether Annexure B fees and expenses is subject to VAT. ADRA therefore provides this opinion to members under the full indemnity with which all opinion are provided and as published on the ADRA website. ADRA does not prescribe to members what interpretation or application of the VAT Act they should apply. ADRA does however caution members that an incorrect application of the VAT Act will have severe negative consequences, and we encourage members to obtain their own professional opinion hereon.
Members are invited to provide the names and contact details of creditors/credit providers who do compel debt collectors to either provide them with VAT invoices or consent to self-invoicing for such transactions. ADRA will, without disclosing the name/s of such members, provide the opinion and letter attached to such creditors/credit providers and engage with them to resolve the matter amicably and without negatively affecting the relationship between client and debt collector.
(Chief Executive Officer)
National Credit Amendment Draft Bill, 2018
The Portfolio Committee on Trade and Industry has published specific clauses of the Draft National Credit Amendment Bill, 2018 and the Memorandum on the Objects of the Bill for public comment. Call for Comments and Submissions closed on 11 June 2018.
The specific clauses:
▪ Clause 12(b) regarding the powers of the Court to reduce interest rates, charges and fees to zero for the period in 86A(6)(d) (5 years).
▪ Clause 29(a) iro the consultation between the Minister of Trade and Industry and the Minister of Finance on funding for financial literacy and capability programmes.
▪ Clause 29(b) iro the new subsection (2B) regarding an adjustment to--
▪ Maximum gross income figure (clause 1 – definition of “debt intervention applicant”, par (b)) in respect of the longer term debt intervention measure set out in clause 13 – section 86A(6)(d) read with clause 14(b) – section 87(1A);
▪ Maximum total unsecured debt (clause 13 – section 86A(1)) in respect of the longer term debt intervention measure set out in clause 13 – section 86A(6)(d) read with clause 14(b) – section 87(1A).
This adjustment in respect of the longer term debt intervention measure must be read with clause 13 – section 86A(12)(a) and clause 15 – section 87A, which clause shows that in respect of the shorter term measure as set out in section 87A, the amounts above may not be adjusted.
Publication of the National Credit Amendment Bill, 2018 - Debt Intervention