Businesses using debt collection agencies will see a rise in costs under new policy guidelines issued by HM Revenue & Customs following the recent European Court of Justice ruling in the 'AXA Denplan' case, a VAT expert at Grant Thornton has warned.

The change in policy, which will extend the circumstances when VAT will have to be charged, will be particularly unwelcome for businesses that are unable to reclaim all of the VAT that they incur, such as those in the financial services sector.

"HMRC's interpretation of the ECJ ruling means that all services that are principally concerned with collecting payments from the person owing them, on behalf of the person to whom they are owed, will fall within the definition of 'debt collection' and will be subject to VAT at the standard rate. This will be irrespective of whether the payments are collected before, on, or after their due date," says Karen Robb, VAT Partner at Grant Thornton.

"Before the ECJ ruling, the definition of what constituted debt collection services was much narrower. The term was usually limited to situations where a debt was due and a third party was appointed to collect the debt on behalf of the creditor. By extending the definition to situations such as those where an agent collects payments under a direct debit mandate prior to their remittance to the creditor, many more services will be caught and the VAT cost to businesses will inevitably increase," continues Robb.

Robb concludes: "This new policy has been forced on HMRC by the surprising ECJ judgment in the AXA Denplan case. All businesses involved in the collection of payments on behalf of third party creditors should be reviewing, and where appropriate changing, the VAT treatment of their supplies if they are to avoid an unexpected VAT liability."

Source: http://www.grant-thornton.co.uk/thinking_blogs/press_room/vat_policy_change_on_debt_coll.aspx