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HMRC internal manual

VAT Cash Accounting Scheme Manual

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HM Revenue & Customs
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Cash accounting scheme: Records and accounts: Factored debts

Factoring is an activity where a person (the factor) takes over the responsibility for collecting another business’s debts. It may be on a long or short-term basis and may involve the provision of a comprehensive sales ledger service and / or full credit management service.

It is important to distinguish between the situations

  • where a factor merely collects debts on behalf of the cash accounting business under a recourse agreement (first heading below), and
  • where a factor purchases the rights in relation to the debt because it has been assigned to him by way of a legal, statutory or equitable assignment under a non-recourse agreement (second heading below).

Recourse agreements

The initial advance made by the factor to the business is not a payment for the purposes of the Cash Accounting scheme, it is simply a loan. Businesses using the scheme must account for VAT in the tax period in which the customer pays the factor.

This payment information should be evident on statements issued by the factor to the cash accounting business.

VAT is due on the full amount collected by the factor. If the payment received by the cash accounting business is less than the full value of the supply, because a commission or other charge is payable to the factor, VAT is still due on the full amount collected.

Non-recourse agreements

VAT must be accounted for in the tax period in which the factor collects payment, and is due on the amount collected. If the debt remains uncollected (in whole or part), VAT must be accounted for in the period that the factor ‘writes off’ any advance made against the debt. Further guidance is in Notice 731 (GOV.UK) and VATFIN3220.

There may be instances under a non-recourse agreement where all or part of a debt is reassigned under a recourse clause. In these cases the cash accounter may qualify for bad debt relief under the normal rules: see Notice 700/18 Relief from VAT on bad debts (GOV.UK).

Selling debts

The full value of the supply must be accounted for in the tax period in which the debt is sold. See Notice 731 (GOV.UK) for further details.