VAT on interest

Gerhard says:
13 May 2015 at 12:37

When you have a business (that is registered for VAT) who collects debt on behalf of his clients, thus he takes the debt over from his client. There is an interest charge on the amounts outstanding after a due period. Does that interest amount give rise to VAT? VAT is charged on the collection from the client as well as a commission charge. S2(1)(f) of the VAT act exempts interest charges as part of financial services. But the client is not a registered financial service provider. I cant find that it says that interest is only exempt if charged by institutions like Banks, and not exempt if charged by any other institution. I cant see how it falls under s 7 of the VAT act I Believe that under S2(f) he falls under financial service, and that he can stand s2(1)(f) What would your opinion be?

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TaxTim TaxTim says:
13 May 2015 at 13:08

Interest never attracts VAT - it does not matter if you are a Financial Service Provider as defined. The essence of VAT is on the end user consuming goods and services. Interest is not a service or good being supplied, but a penalty for late payment and thus does not qualify for VAT to be charged. Your service fees for collecting debt would be subject to VAT however.

Gerhard says:
13 May 2015 at 14:09

Thank you for the reply.

I'm just going to play devils advocate here quick... Why cant it be seen that the interest forms part of the service provided, and thus forms part of the total amount which then attracts the VAT?

I'm not to sure how exactly it is done and if I have this right, but say when you get finance on a car, that amount charged to you as an invoice does not say which is capital and which is interest and has VAT on the total. How would you then take the interest out of that amount

TaxTim TaxTim says:
13 May 2015 at 18:32

If you ask for a more comprehensive invoice you will see that interest is on the entire total. So they add up the capital cost plus the VAT then you get finance for that amount of which interest is charged. They don't charge the interest first and then the VAT.

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