Factoring: VAT taxability?

Factoring activities must be regarded as falling within the scope of VAT. In its judgment in MKG (C-305/01), which concerned a so-called ‘true' factoring agreement – that is to say one characterised by the purchase by the factor of his or her client's debts without having a right of recourse against the client in the event of default by the debtors – the Court ruled, pursuant to the Sixth Directive (77/388/CE), that such an activity constituted a supply of services for consideration which falls within the scope of VAT. In arriving at that conclusion, the Court noted in particular that ‘the relationship between the factor and his or her client is governed by a contract under which there is reciprocal performance', the latter consisting in practical terms, for the factor, ‘in relieving [the client] of the debt-recovery operations and of the risk of the debts not being paid' and, for the client, paying, in return for the service thus received, remuneration corresponding to ‘the difference between the face value of the debts … assigned to the factor and the amount which the factor pays him or her for the debts'.

These conclusions can also be applied to trade factoring, since it has, essentially, the same characteristics as the ‘true factoring' at issue in the judgment in MKG . Under a trade factoring agreement, the fact...