Where a vendor has made taxable supplies of goods or services on credit, and has accounted for VAT at the standard rate on such supplies, the vendor is entitled to a deduction of the VAT previously accounted for to the extent that the debt is written off as irrecoverable.

If the written down book debts are subsequently sold to another vendor, such as a bank or debt collector on a non-recourse basis, the sale is exempt from VAT and the seller is not required to make any adjustment in respect of the debts previously written off.

The purchaser is in turn also entitled to a deduction of VAT to the extent that the purchaser writes such debt off as irrecoverable. The deduction by the purchaser is equal to the tax fraction of the face value of the debt transferred, but limited to the amount which the purchaser paid for the debt.

It is not clear from the VAT Act as to what is meant by the ‘face value of the debt transferred’, ie whether it is the total amount of the debt owing or the amount owing less the debts previously written off by the seller. This uncertainty may have given rise to a double deduction, ie a deduction by both the seller and the purchaser.

In order to prevent such a double deduction, a definition of the term “face value of a debt transferred” will be introduced to make it clear that such face value is the amount less any amounts previously written off by the seller as irrecoverable