Abstract
The merchant cash advance is an emerging lending product designed to address the need to maintain cash flows and is essentially the business equivalent of a “payday” loan. A lump-sum advance is made by the merchant cash advance service provider to a business (the merchant) in exchange for an agreed upon percentage of future credit and/or debit card receivables. This article investigates the taxation consequences of merchant cash advance transactions in South Africa, in an attempt to provide guidance which is currently lacking. Although it is posited that a merchant cash advance is a form of debt factoring, the income tax treatment of the initial advance and the resulting discount reflect that of a loan. Through the investigation it was determined that merchants will be able to deduct the discount and processing fees from income. The merchant cash advance service provider will include such discount and processing fee in ‘gross income’. The initial advance and any resulting discount are held to be a ‘financial service’ and therefore an exempt supply for VAT purposes, with the processing fee constituting a taxable supply.
Highlights
The merchant cash advance (MCA) is an alternative form of finance that has been increasing in popularity since the credit crisis in 2008
It is posited that a merchant cash advance is a form of debt factoring, the income tax treatment of the initial advance and the resulting discount reflect that of a loan
MCAs differ from debt factoring in that debt factoring involves existing debt, while MCAs are based on future credit and debit card sales, i.e. the merchant has yet to generate sales resulting in the future receivables
Summary
The merchant cash advance (MCA) is an alternative form of finance that has been increasing in popularity since the credit crisis in 2008. In its most common form, a lump sum advance is made by the MCA service provider to a business (the merchant) in exchange for an agreed upon percentage of future credit and/or debit card receivables (Tozzi, 2009). Transactions are often designed as purchases and sales of future receivables between an MCA service provider and a merchant (Weston, 2012). The taxation consequences could, be affected by the classification of the MCAs as a form of debt factoring or as loans. The fact that settlement is based on certain future receivables may be indicative of a form of debt factoring Difficulty with such classification has been highlighted in the American case of Advanceme Inc. In order to conclude on the classification of MCAs (either as a form of debt factoring or as loans), relevant case law, literature relating to MCA service providers as well as accounting literature were reviewed. The value of the research lies in the guidance it could provide regarding the taxation consequences of MCAs, in the light of the current lack of definitive guidance on the topic
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
