Costs of debt collection services - how to settle?

Virtually every company has met with unreliable contractors. In a situation where debt recovery is difficult, entrepreneurs decide to hire debt collection companies. Expenses for this type of service are expensive, so the question arises whether the costs of debt collection services may constitute a tax cost?

What are tax deductible costs?

Tax-deductible costs are all rational and economically justified expenses related to the conducted business activity. The assessment of the connection with the conducted activity should show that the incurred expenditure may objectively contribute to the achievement of revenues from a given source. Therefore, in order for an expense to be considered a tax deductible cost, it must meet the following conditions:

• be in a cause-and-effect relationship with the income or source of income and be incurred in order to achieve income or to preserve or secure the source of income,

• not be on the list of costs not recognized as tax deductible costs,

• be properly documented.

Debt collection services undoubtedly show a connection with the conducted business activity.

The catalog of expenses not considered costs indicates that they do not constitute tax costs, e.g. enforcement costs related to default.

This exemption does not apply to expenses incurred on debt collection activities, so the costs of debt collection services may be considered tax costs.

Therefore, it should be concluded that the costs of debt collection services incurred by taxpayers are related to the conducted business activity and indirectly with the generated revenues, therefore they constitute tax deductible costs.

This position is also confirmed by the tax authorities, an example of which is the individual interpretation of the Director of the Tax Chamber in Poznań of March 12, 2012, file ref. ILPB1 / 415-1390 / 11-4 / AA:

(...) fees for debt collection are not listed in the catalog of non-tax deductible expenses specified in Art. 23 above the law. Thus, the possibility of classifying these expenses as tax deductible costs of non-agricultural business activity depends on the fulfillment of the general conditions for including expenses as tax deductible costs under Art. 22 sec. 1 of this act (...).

Costs of debt collection services - VAT deduction

Joke. 86 sec. 1 of the VAT Act shows that the taxpayer has the right to reduce the amount of tax due by the amount of input tax to the extent that the goods or services are used to perform taxable activities.

The relationship between purchases and the taxpayer's activity may be direct or indirect.

There is a direct relationship between purchases and business activity when the purchased goods are used, for example, for resale. The indirect connection of the purchases made with the taxpayer's activity can be considered when the purchase of goods and services does not directly contribute to the taxpayer's income, e.g. through resale, but through its impact on the overall functioning. The enterprise as a whole contributes to the entity's turnover.

In the case of the purchase of debt collection services, we are dealing with the second case, i.e. an indirect relationship. Therefore, there are no obstacles to deduct VAT from invoices documenting the costs of debt collection services.

Such a position was confirmed by the Head of the Second Tax Office in Radom in the individual interpretation of September 1, 2005, ref. No. 1425/021/443/43/05 / IW, where we can read:

(...) you will be entitled to deduct VAT from the invoices received for debt collection activities in accordance with Art. 86 sec. 1 in the quotation the VAT Act (...).

Charging the contractor with debt collection fees

It happens that taxpayers charge unreliable contractors with the costs of debt recovery, such as: fees for drawing up requests for payment, costs of sending a reminder, etc. In such a situation, the question arises whether these activities are subject to VAT.

As a rule, VAT is subject to chargeable transactions, i.e. the paid delivery of goods and the paid provision of services. In some situations, however, taxable activities are also free of charge, including the free transfer of goods by the taxpayer.

The delivery of goods is the transfer of the right to dispose of the goods as the owner (Article 7 (1) of the VAT Act).

However, according to the definition contained in Art. 8 sec. 1 of the VAT Act, the provision of services is understood as any service for a natural person, legal person or organizational unit without legal personality, which does not constitute a supply of goods within the meaning of Art. 7 of the VAT Act.

Charging the contractor with the costs of debt collection services, such as the costs of calls for payment or the costs of correspondence, are not subject to VAT due to the sanctions nature. Such fees do not constitute remuneration for the contractor's provision of any services to the taxpayer. Thus, they should not fall within the scope of the tax on goods and services.

This position is confirmed by the tax authorities, an example of which is the letter of the Director of the Tax Chamber in Poznań of July 18, 2012, no. ILPP1 / 443-390 / 12-2 / AI, where he stated that:

(...) charging lump sum costs for sending a request for payment by registered mail - in the event that the customer is late with payment - does not constitute a delivery of goods within the meaning of Art. 7 sec. 1 of the Act, or the provision of services within the meaning of Art. 8 sec. 1 of the act. Thus, the reimbursement of costs does not constitute a taxable activity as defined in Art. 5 sec. 1 of the Act, which should be documented with a VAT invoice. Therefore, the Applicant may issue a debit note in this case (...).