Credit, debts and related services: debts and related services: debt collection
Description of service
A debt collection agency will attempt to collect payments from debtors on behalf of creditors. This could either be because the creditor is unable to make contact with the debtor, cannot get the debtor’s co-operation to pay or to continue making payments or, because the creditor uses the agency to simply outsource some of the debt collection activity.
Typically, an agency does not take assignment of the debt. The agency will charge a fee or commission for amounts recovered; non-recovered debts will be returned to the creditor as un-collectable. Non-collected debts may subsequently be passed by the creditor to other agencies. This is referred to as secondary or tertiary placement. Again, a fee or commission will be charged; non-collected debts will again be returned to the creditor.
Contact with debtors is typically, initially by letter, followed by telephone calls, other letters, email or text messages, the sequence being determined by the chasing process and response or non-response from the debtor. The object is to ensure that the debtor either pays the outstanding balance immediately, or begins/continues repayments of the outstanding balance in staged payments.
The agency may sue debtors on behalf of clients or carry out doorstep collection or enquiry work for clients.
Collection agencies may become clients themselves in that they may instruct another agency for example in doorstep collection or location of absconded debtors.
The business handled by debt collection agencies will normally fall into two categories: consumer and commercial. Consumer clients will, for example, be in the banking and financial sector, utilities and local government. Business clients can involve all types of commercial enterprises. Agencies may also receive collection instructions from debt purchase companies.
In addition to debt collection, agencies may offer the following services (although the list is not exhaustive):
- status enquires and company searches
- repossession and card recovery
- bailiff and process servings
- call centre support
- consultancy and advice.
Some of this work may be outsourced by the agency.
Supply and liability
The service supplied by a debt collection agency is a single composite supply, the core of which is debt collection.
Debt collection is specifically excluded from the finance exemption, and is thus taxable.
It should be noted that some businesses have sought to use the DMA case (see VATFIN3250) as a reason to exempt taxable debt collection services. Any negotiation service that may occur is ancillary to the main supply of debt collection and therefore follows the liability of that supply.
HBOS plc and Barclays Bank
The liability of debt collection services outsourced by banks has been the subject of litigation involving HBOS and Barclays Bank. In HBOS plc (20118) the Scottish tribunal found HBOS were the recipient of a single supply of taxable debt recovery services. This was appealed by HBOS to the Court of Session who agreed with the tribunal. Barclays Bank separately appealed to the London tribunal who also found in favour of HMRC. This latter case provides clear comment on the ancillary nature of the negotiation and payment handling elements of debt collection.
AXA UK plc
The scope of the debt collection exclusion was considered in the ECJ case of AXA UK plc (C-175/09). Denplan were members of the AXA VAT group and provided f payment plans for dentists which offered the patient the facility of paying for dental treatment by way of a fixed monthly charge. The Court found that the supply Denplan made to the dentists of collecting and administering direct debit payments due under the plans was specifically excluded from Article 135 (1)(d) exemption as ‘debt collection’.
The ECJ specifically defines what ‘debt collection’ means for the purposes of the exclusions to the VAT exemption and says in paragraph 34 of its judgment that it is irrelevant that such service is supplied at the time when the debts concerned become due …
It then goes onto say that the words ‘debt collection’ in Article 135(1)(d) cover the collection of debts of any nature, without limiting their application to debts which were not paid on their due date and also cover debts which have not yet become due and which will be paid on the due date.
Following the AXA judgment, therefore, ‘debt collection’ cannot be seen as applying solely to the service of chasing and recovering overdue payments on behalf of the creditor. All services principally concerned with collecting payments from the person owing them for the benefit of the entity to which those payments are owed (regardless of whether those payments are received before, on, or after their due date) fall within the exclusion to the exemption and are consequently liable to VAT at the standard rate.
In HMRC v DPAS UKUT 373, the UT decided to refer to the CJEU, the question of whether the services provided under a dental plan involving direct debit processes were an exempt payment transaction or taxable debt collection.
DPAS provided dental plans to dentists under contractual arrangements which had been changed from January 2012. The issue concerned whether DPAS provided services to patients and whether the services were exempt as a transaction concerning payments (ref PVD Article 135 (1)(d)). The UT had partially decided the case in November 2015 and had directed the final determination of the liability of the supplies DPAS made to patients be reserved until after the CJEU had provided its judgment in Bookit (C-607/14) and NEC (C-130/15).
However, the UT did not consider that the judgments in Bookit and NEC provided the answers as they concerned card handling and not direct debits. In addition, clarification is required from the CJEU on whether a service can be debt collection where the supply is to the debtor (patient) and not the creditor (dentist) (ref AXA UK C-175/09).