PE73700 | Guidance for specific trade sector: Finance: Invoice factoring and discounting

The administrative agreement with the Association of British Factors and Discounters (now subsumed as part of UK Finance) in Notice 700/57 provided a framework for requesting methods in respect of Invoice Discount Factoring and Mainline Factoring which included outputs where costs could not be split between the sectors as well as suggested transaction calculations. This agreement has been withdrawn from 1 May 2020.

The term ‘factoring’ covers a variety of services involving debt assignment (often referred to as the purchase of debts), which the factor may provide to clients in respect of debts owing from their trade debtors.

For further information on factoring see VATFIN3220

Partial exemption calculation

The default calculation for partial exemption is based on the value of the supplies made. Case C-511/10 Baumarkt indicates that this should only be departed from in order to increase the accuracy of the calculation. Accordingly, proxies other than the turnover of the activity should only be used if they improve the accuracy of the calculation, and should address the reason why an output values calculation does not reflect the use of the VAT bearing costs.

A business with an approved Partial Exemption Special Method (PESM) that incorporates the agreement should review its methodology to ensure it gives a fair and reasonable result.

If a new proposal is made, or HMRC review the approved PESM, a business should be able to demonstrate why an outputs calculation does not reflect the use of costs. It should also demonstrate why the calculation proposed improves the accuracy of the apportionment calculation and gives a fair and reasonable result.