Credit, debts and related services: debts and related services: debt negotiation services
Description of service
The liability of debt negotiation was the subject of the tribunal case Debt Management Associates Ltd (‘DMA’ - tribunal decision 17880).
DMA carried on a business managing its clients’ debts, the clients being individuals who had incurred debts that they were finding themselves unable to repay. Potential clients would contact DMA, who would take details of income and expenditure and assist them in drawing up a repayment schedule. If the client agreed to allow DMA, for a fee, to act on his/her behalf, DMA would put the repayment schedule to the creditor(s) for their approval. If the creditor(s) refused then DMA would go back to the client and either see if the plan could be modified or see if the client wished to proceed further. Changes made to the plan were communicated back the creditor(s).
If the debtor defaulted in his/her payments DMA would not be liable.
Supply and liability
In the case of DMA, the Tribunal found that the supply is debt negotiation (i.e. acting as an intermediary for the purposes of item 5 with regard to an item 1 supply) and thus exempt.
If the debt company merely collects the debt on behalf of another company see VATFIN3255.
For further information on when someone is acting as an intermediary see VATFIN7200 of this guidance.