VAT Treatment on Debt Collection Fees

[NB-B&G]

We sent an invoice to debt collection, and the invoice has been paid, along with the debt collection fees on top. When sending a VAT invoice to our customer that paid all of the above, how do we account for the debt collection fees? We currently use a debt collection agency based in Poland so we do not get charged VAT. Do we pass on this cost without VAT or do we have to effectively increase our sale value to be inclusive of the debt collection fees, all attributable to VAT?

Our invoice was for £5,000 + VAT = £6,000
The debt collection agency received £6,720 as full and final settlement which covers their charges that we incur on them retrieving the debt. They send us an invoice which is Zero Rated for VAT as they are based in Poland.

 

[Paul Kelly ICHYB]

The debt is settled and the charges are separate. If they did not charge VAT, you do not record it (but it is an EU purchase!)..

 

[MyAccountantOnline]

We sent an invoice to debt collection, and the invoice has been paid, along with the debt collection fees on top. When sending a VAT invoice to our customer that paid all of the above, how do we account for the debt collection fees? We currently use a debt collection agency based in Poland so we do not get charged VAT. Do we pass on this cost without VAT or do we have to effectively increase our sale value to be inclusive of the debt collection fees, all attributable to VAT?

Our invoice was for £5,000 + VAT = £6,000
The debt collection agency received £6,720 as full and final settlement which covers their charges that we incur on them retrieving the debt. They send us an invoice which is Zero Rated for VAT as they are based in Poland.

How much did you actually receive from the debt collection agent and how was the amount you received calculated?

 

[NB-B&G]

How much did you actually receive from the debt collection agent and how was the amount you received calculated?

We received the £6,000 exactly as the funds were paid directly to the debt collectors on which they charged £720 (12% of the total sum received).
They send us the invoice for the £720 that they've already taken from the total sum received into them.

Our customer that paid the outstanding debt plus the debt collection fees requested an invoice from us for the balance that they paid of £6,720.

Is it correct to issue an invoice for the full £6,720 with it split as per the below:

Providing our Services - £5,000 + VAT = £6,000
Debt Collection Fee Disbursement (EC Zero Rated) = £720
Total Invoice = £6,720

 

[Paul Kelly ICHYB]

They already have an invoice for £6k - that's what they owe you.

The £720 is a charge from the debt collectors and should be identified on a receipt - you do not invoice for that!

 

[NB-B&G]

They already have an invoice for £6k - that's what they owe you.

The £720 is a charge from the debt collectors and should be identified on a receipt - you do not invoice for that!

So technically the £720 receipt should be what the debt collectors provide directly to our customer themselves?
I felt like this should be the case.

Theoretically speaking then, if we end up receiving more than our initial invoice after going to debt collection, would we effectively up the sale to that value, applicable to VAT, or would you process the additional received as late payment interest therefore not vatable?

 

[MyAccountantOnline]

So technically the £720 receipt should be what the debt collectors provide directly to our customer themselves?
I felt like this should be the case.

Theoretically speaking then, if we end up receiving more than our initial invoice after going to debt collection, would we effectively up the sale to that value, applicable to VAT, or would you process the additional received as late payment interest therefore not vatable?

If your customer has paid you an additional £720 to cover additional costs you've incurred unless it's a disbursement you'll need to account for VAT on the charge.

HMRC have a guide here on what a disbursement is

VTAXPER39000 - Issues to consider: agency and disbursements: how to recognise a disbursement - the eight conditions - HMRC internal manual - GOV.UK

www.gov.uk

 

[Paul Kelly ICHYB]

Did they pay you £720 or the debt collectors, who then passed on £600 to you?

 

[NB-B&G]

If your customer has paid you an additional £720 to cover additional costs you've incurred unless it's a disbursement you'll need to account for VAT on the charge.

HMRC have a guide here on what a disbursement is

It is a direct disbursement on which we don't get charged VAT by the debt collection agency as they are based in Poland

Did they pay you £720 or the debt collectors, who then passed on £600 to you?

Our customer paid the debt collectors £6,720.
The debt collectors then sent us £6,000 and an invoice from them with the £720 already marked as paid.

 

[MyAccountantOnline]

It is a direct disbursement on which we don't get charged VAT by the debt collection agency as they are based in Poland

Our customer paid the debt collectors £6,720.
The debt collectors then sent us £6,000 and an invoice from them with the £720 already marked as paid.

When I was referring to a disbursement I meant if your customer had paid you £6,720 to include an additional charge for the fees you incurred.

Your customer has paid the debt collector and you've been paid so you dont need to account for anything other than the receipt from your customer.

 

[Paul Kelly ICHYB]

Your customer has paid the debt collector and you've been paid so you dont need to account for anything other than the receipt from your customer.

Phew, tought so!

 

[numbersrule]

It is a direct disbursement on which we don't get charged VAT by the debt collection agency as they are based in Poland

Our customer paid the debt collectors £6,720.
The debt collectors then sent us £6,000 and an invoice from them with the £720 already marked as paid.

My suggestion would be to be totally transparent with your Customer and send them a copy of the Invoice marked as 'Paid' that the Debt Collection Agency sent you.

From your Customer 's point of view the missing piece of the Jig Saw here is that the Invoice that the Debt Collection Agency sent you marked as Paid was actually Paid by the Customer.
So who was the Debt Collection Agency's Invoice for £720 actually addressed to?

If it was addressed to you then perhaps you should consider if the Invoice should be readdressed to the customer. Otherwise you will have no way of reconciling the fact that you haven't paid £720.

Then the customer will have two Invoices totalling £6,720 that they can reconcile.

 

[NB-B&G]

My suggestion would be to be totally transparent with your Customer and send them a copy of the Invoice marked as 'Paid' that the Debt Collection Agency sent you.

From your Customer 's point of view the missing piece of the Jig Saw here is that the Invoice that the Debt Collection Agency sent you marked as Paid was actually Paid by the Customer.
So who was the Debt Collection Agency's Invoice for £720 actually addressed to?

If it was addressed to you then perhaps you should consider if the Invoice should be readdressed to the customer. Otherwise you will have no way of reconciling the fact that you haven't paid £720.

Then the customer will have two Invoices totalling £6,720 that they can reconcile.

I'm in agreement with you on this, it's just that the debt collection are providing their services to us so I understand why they invoice us in this sense. I am currently just raising the sales invoice containing VAT for our services and then processing a disbursement on the invoice EC Zero Rated for the debt collection balance to Legal Expenses. Then i'm processing the debt collection invoice on the system to Legal Expenses also so it effectively contra's itself off.
I'm not sure if it's 100% the way it should be done, but it seems like a relatively logical approach and the applicable VAT on the sale is being paid over to HMRC which is the main part.

 

[numbersrule]

I'm in agreement with you on this, it's just that the debt collection are providing their services to us so I understand why they invoice us in this sense. I am currently just raising the sales invoice containing VAT for our services and then processing a disbursement on the invoice EC Zero Rated for the debt collection balance to Legal Expenses. Then i'm processing the debt collection invoice on the system to Legal Expenses also so it effectively contra's itself off.
I'm not sure if it's 100% the way it should be done, but it seems like a relatively logical approach and the applicable VAT on the sale is being paid over to HMRC which is the main part.

You make a good point about the service being provided to you, and I see now the Invoice was addressed to you. Your accounting treatment kind of makes sense as you are both selling the debt collection service and purchasing the debt collection service and are thereby passing on the Debt Collection Agency costs to your Customer.

However, you are right to think that it is not 100% correct.

For your accounting treatment to be strictly correct it would be necessary for you to have received the debt collection fee from your customer thereby enabling you to pay the Debt Collection Agency. But that has not happened because your Customer paid the Debt Collection Agency.

So if you have been able to process the Debt Collection Invoice via Legal Expenses, I'd be interested to know what the bottom line balance is on that Purchase Invoice from the Debt Collection Agency. If they marked it as paid, are you sure the bottom line balance is not zero? If it is not zero then get it corrected.

The same goes for your 'Sales Invoice' for the Debt Collection Agency fee. Remember you will never receive a payment for that from your customer so the Invoice needs to be marked as Paid and should show a zero outstanding balance.

That way there will be 2No zero transactions in Legal Expenses, which is exactly the reality.

Otherwise, if there are positive balances showing on the Sales and Purchase Invoices then they would both need dummy Credit Notes to avoid them being forever in limbo.

 

[NB-B&G]

You make a good point about the service being provided to you, and I see now the Invoice was addressed to you. Your accounting treatment kind of makes sense as you are both selling the debt collection service and purchasing the debt collection service and are thereby passing on the Debt Collection Agency costs to your Customer.

However, you are right to think that it is not 100% correct.

For your accounting treatment to be strictly correct it would be necessary for you to have received the debt collection fee from your customer thereby enabling you to pay the Debt Collection Agency. But that has not happened because your Customer paid the Debt Collection Agency.

So if you have been able to process the Debt Collection Invoice via Legal Expenses, I'd be interested to know what the bottom line balance is on that Purchase Invoice from the Debt Collection Agency. If they marked it as paid, are you sure the bottom line balance is not zero? If it is not zero then get it corrected.

The same goes for your 'Sales Invoice' for the Debt Collection Agency fee. Remember you will never receive a payment for that from your customer so the Invoice needs to be marked as Paid and should show a zero outstanding balance.

That way there will be 2No zero transactions in Legal Expenses, which is exactly the reality.

Otherwise, if there are positive balances showing on the Sales and Purchase Invoices then they would both need dummy Credit Notes to avoid them being forever in limbo.

I believe that I may have been overcomplicating this afterall as the invoice that we do receive from debt collection is a zero balance on the bottom line as they have marked it as paid from the funds that they receive directly from the client, resulting in us only receiving the balance leftover.
I think it has always been overcomplicated as our clients have always requested an invoice for the balance that they have paid to the debt collectors who then ask us for said invoice reflecting it. All we should technically be doing is sending them the cost of our services provided, and our debt collectors should be sending a copy of their fees to our client then?

The ledgers always balance off due to when reconciling the receipt, our sales invoice is grossed up to be inclusive of the debt collection fee (making sure as to not charge more VAT than necessary) and the debt collection invoice goes on with a balance due so the net effect comes back to the funds that we have received.

I will do as you have mentioned though and only process our sale to the funds that we receive, and put the debt collection invoice on at a zero value just for the paper trail our side. It is a more logical approach to it and reduces the risk of over-inflating our sales etc.