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Inland Revenue Clarifies VAT Treatment for Supplies in Satisfaction of Debt.

If the asset owner (e.g. mortgagor, hirer) is registered for VAT, the creditor (e.g. Mortgagee, financier) is required to charge and account for VAT on the sale of assets. This is regardless of whether the creditor is VAT registered or not. The creditor is responsible for filing a special return (CT218) and for paying the VAT charged on the sale. 

According to Section 16(2) of the VAT Act No. 12 of 1998, creditors (whether or not is a registered person) will be required to file a special return ONLY if they are supplying goods defined under Section 3(1) of the act ‘as goods or services acquired or produced by a registered person in the course of carrying on a taxable activity are supplied by a creditor in satisfaction of the registered person’s debt’.

Example: Sam, a registered person, takes out a loan from a bank in order to purchase a new truck for his business.  After a while the bank notices that Sam has not been making their required loan payments.  The bank meets with Sam and establishes that he will not be able to pay back the loan.  The bank then takes back the truck and sells it to pay off Sam’s loan debt.  The sale of the truck by the bank is a deemed supply under Section 3(1).

The commercial banks are non registered persons under the VAT Act for their core activity and are not required to file VAT return. However, in situation where the banks are granted with court ordered “power of sale”  to dispose a registered persons taxable goods and/or  assets in satisfaction of the registered person’s debt, the banks is liable under Section 16(2) of the VAT Act to file a special return (special return prescribed form.) accounting for the tax on that supply.

To account for VAT, the creditor (e.g. bank) must furnish the Special Return and account for VAT by the 27th day of the month following the taxable period in which the sale was made. The person completing the Special Return (CT218) must show:

  • The seller’s (creditor’s) name, address, and VAT registration number, if registered for VAT;
  • The asset owner’s name, address and VAT registration number;
  • The date of the sale;
  • The description and quantity of the goods sold;
  • The amount for which the goods were sold inclusive of VAT.

The creditor selling the goods/assets (e.g. the bank) must provide a copy of the Special Return to the registered person whose goods/assets were sold. The registered person (owner) should not report the sale transaction in their normal VAT return as it has already been accounted for in the Special Return filed by the creditor.

Where a creditor (e.g. bank) sells a registered person’s business (taxable activity or part of a taxable activity) in satisfaction of debt, the sale could be of a going concern and zero rated for VAT purposes. However all conditions of a supply of a going concern must be met.

For more information on any VAT issues, please contact the VAT Office by phone: 00(678) 24573 and 00(678) 37517 (Santo), visit us at our Office in Carnot Street, Port Vila or email us.