How will factoring affect my bookkeeping if I am paying VAT on a cash accounting basis?

In respect of VAT requirements of the Cash Accounting scheme HM Revenue & Customs make the distinction between the basic two types of factoring – recourse and non-recourse. This is what they say:

FACTORING AGENT ASKED TO COLLECT DEBTS ON BEHALF OF A CASH ACCOUNTER UNDER A RECOURSE AGREEMENT

The initial advance made by the factor to the business is not a payment for the purposes of the Cash Accounting scheme, it is simply a loan. Businesses using the scheme must account for VAT in the tax period in which the customer pays the factor.

This payment information should be evident on statements issued by the factor to the cash accounting business.

If the payment received by the cash accounting business is less than the full value of the supply, because a commission or other charge is payable to the factor, VAT is still due on the full value of the supply.

DEBTS SOLD OR FORMALLY ASSIGNED TO FACTORING AGENTS OR INVOICE DISCOUNTERS UNDER A NON-RECOURSE AGREEMENT

The full value of the debt must be accounted for in the tax period in which the debt is sold or formally assigned, to a factor, under a non-recourse agreement.

There may be instances, under a non-recourse agreement, where all or part of a debt is reassigned under a recourse clause. In these cases the cash accounter may qualify for bad debt relief under the normal rules.

Please note non-recourse factoring is where the factor provides bad debt protection.
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