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HMRC internal manual

VAT Taxable Person Manual

HM Revenue & Customs
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Issues to consider: identifying disbursements in particular areas and trades: debt collectors

VTAXPER49000 deals with the treatment by debt collectors (‘collectors’) of VAT charged by solicitors for their services of pursuing the debt through the court and of fees paid by solicitors to the court and recovered from the debtor. It also deals with the VAT treatment of costs awarded by the court against the debtor to cover the court fees and the solicitors’ charges where the agreement with the creditor allows the collector to retain these monies. In the past, collectors have regarded the services of solicitors engaged to pursue the debt as being supplied to them, and have recovered the VAT charged by solicitors as their input tax. At the same time, however, they have not accounted for any output tax on amounts they retain which are collected from debtors in respect of costs awarded by the court.

Court fees and solicitors’ scale charges are awarded by the court to the creditor, and are outside the scope of VAT. However, where the creditor allows these monies to be retained by the collector, their nature changes to that of simply being payments made by the creditor to the collector.

There are arguments either way for seeing collectors as agents of the creditor or as acting in their own right in pursuing legal recovery of debts, and the true position in any particular case may depend on the precise arrangements in place. However, whatever the position, where the collector retains monies belonging to the creditor, these can only be one of two things:

  • either consideration for the collector’s supply of services to the creditor,
  • or reimbursement of payments made by the collector on the creditor’s behalf.

New arrangements

Following consultation with the trade, we operate a revised policy with effect from 1 April 1998. We have also agreed not take action to recover any tax that might be underdeclared on supplies made before this date. However, nothing in the agreement restricts the freedom of collectors to negotiate and agree with their clients as to how sums collected from the debtors are to be allocated between the principal debt, court fees and solicitors’ scale charges.

Collectors who act as agents

Court fees

Amounts paid by collectors to solicitors in respect of court fees may be treated as disbursements made on behalf of the creditor. Any amount recovered from debtors in respect of such fees and retained by collectors may then be regarded as reimbursement of the amount disbursed and outside the scope of VAT.

In respect of VAT charged by solicitors for their services, there are only two options open to collectors.

  • They may choose not to recover the VAT as input tax, and simply treat the charges as disbursements in accordance with section 25.1 ofNotice 700 The VAT Guide. In this case, where the agreement with the creditor provides that the collector bears the cost of solicitors’ services but may retain, as reimbursement of his costs, any amounts recovered from the debtor in respect of solicitors’ scale charges awarded by the court, such amounts may be treated as outside the scope of VAT.
  • Alternatively, they may choose to recover the VAT as input tax, subject to the normal rules, but recharge the fees plus VAT to the creditor under the terms of section 47(3) of the VAT Act 1994 (see VTAXPER37900). Under this option, the scale charges retained represent payment of the fees recharged.

Collectors who act as principals

If, in the particular circumstances of any case, the collector considers that he is acting as a principal, any VAT charged by the solicitor may be recovered as input tax, subject to the normal rules. However, any amounts recovered from the debtor both in respect of court fees and/or solicitors’ scale charges and retained by the collector can only represent consideration for his supply of services to the creditor. Output tax must be accounted for on all such amounts in the normal way. This treatment will not apply to assignments of debts for which the next paragraph applies.

Assigned debts

An equitable or legal assignment of the debt to the collector, whether in whole or in part, is an exempt supply of services to the collector. Collection of both equitably or legally assigned debts by the person to whom they are assigned is outside the scope of VAT.