Credit, debts and related services: debts and related services: sale and assignment of a debt
Sale of a debt
The sale of a debt is a financial transaction, whereby the purchaser acquires ownership of debts from a creditor, at a nominal sum to the face value of the debts. The purchaser assumes all the rights and obligations of the original creditor and all legal and beneficial or equitable interest passes to the buyer to whom full title and risk is transferred.
The purchaser of a debt portfolio may either use an in-house operation to effect recovery or contract with one or more debt recovery agencies for use of their collections services as described in VATFIN3255. Depending on the contractual agreement with the original creditor, the purchaser may sell on all or part of the debts acquired.
The purchaser of a debt portfolio has no right of recourse to the seller for un recovered debts except where debts are deemed to be irrecoverable prior to the date of purchase e.g. deceased customers. In some cases the sale contract may allow the purchaser to return these accounts and gain a return of the relevant purchase amount.
Unless there is a chargeback agreement for unsupported balances, the purchaser does not return uncollected debts to the original creditor - the purchaser will write off the debts and take the loss.
Debt purchase companies may also offer contingency debt collection services as described in VATFIN3255.
In the sale of a debt, all legal and beneficial or equitable interest passes to the buyer to whom full title and risk is transferred.
We are currently waiting the judgment of the Court in a German ECJ reference concerning GFKL Financial Services AG (C-93/10) which questions whether the sale (purchase) of defaulted debts constitutes a service for consideration and an economic activity on the part of the purchaser of the debts even if the purchase price is not based on the face value of the debts. If it is an economic activity would it be exempt from VAT? If it is exempt from VAT, is the recovery of the debts exempt from VAT, as part of a single service or as an ancillary service, or taxable as a separate service? This guidance will be updated as necessary to reflect the outcome of this referral.
Assignment of a debt
For purposes of this guidance we distinguish the assignment of a debt from a sale of a debt, in that with an assignment only the equitable interest is passed to the assignee and the assignor retains the legal interest in the debt and any liability to obligations arising from the original contract. Often it will not be possible for the assignee to sell that which has been assigned.
The use of the term ‘assignment’ can cause misunderstanding and it is essential to be quite clear as to what is actually happening in any particular set of circumstances. If doubts arise, the VAT Deductions & Financial Services Team should be consulted.
Supply and liability
Sale of a debt
The sale of a debt is exempt from VAT under the VAT Act 1994, Schedule 9, Group 5, item 1.
Input tax incurred by a business chasing debts it has bought relates to a business activity. The input tax incurred by a business for use in making a supply in the course of business may be recoverable subject to the normal rules. For further information on business/non-business see V1-6 - Business/non-business.
Assignment of a debt
Within the terms defined in preceding paragraphs, the assignment or re-assignment of a debt is not a supply for VAT purposes.