Possible growth, but also more problems: Split payment in factoring | In Principle

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Possible growth, but also more problems: Split payment in factoring

Factoring is growing rapidly in Poland. According to the Polish Factors Association, the value of receivables that are the subject of factoring is growing year on year by an average of 18%. Introduction of split payment may strike at the financial liquidity of firms seeking financing, but it may also drive growth in the factoring industry. But every rose has thorns. Split payment complicates factoring transactions and introduces new risks for factors.

Split payment

The split payment mechanism entered into force on 1 July 2018 and is intended to close gaps in VAT trading. Essentially, when paying invoices received in Polish zloty, split payment enables payment to be made by one transfer order to two accounts: the net amount under the invoice (or part of it) to the recipient’s regular current account, and the VAT amount (or part of it) to a segregated VAT account, opened automatically by banks for each of the current accounts of their business customers. A detailed description of the split payment mechanism is found here.

The choice of whether to pay an invoice by ordinary transfer or using split payment is up to the debtor. A range of tax incentives have been introduced to motivate debtors to choose the split payment mechanism. Also, a number of state-owned companies have declared that they will follow this method. It is not known yet how many debtors will use split payment and what the systemic effects of the mechanism will be.

One of the expectations is that the financial liquidity of many entities will be reduced, because the funds in the VAT account can be used by the holder of the account only for limited purposes (mainly to pay VAT to its own suppliers or to the tax office). This means that when a taxpayer receives payment in the split payment system, it will not be entitled to freely circulate the funds corresponding to the amount of output VAT. In extreme instances, particularly where the taxpayer has already had liquidity problems, the use of split payment by many of its customers could seriously disrupt the current finances of the enterprise.

Such entities will seek out methods for improving their financial liquidity. One of the methods is factoring, which could give a further impetus to an industry that is already rapidly expanding.

New risk: expanded liability

Entry into force of split payment also means a potential expansion of factors’ liability. If under the factoring agreement the gross amount is financed, and the seller’s debtors pay the amounts due under the invoices to the account of the factor (a VAT payer), the debtors can use the split payment mechanism. Under the new regulations, if amounts are received in the factor’s VAT account through the use of split payment, the factor will be jointly and severally liable with the seller for VAT not paid by the seller, up the amount received in the VAT account. The factor can be released from this liability if it transfers the amount reaching its VAT account to the VAT account of the seller or the person making the payment (the seller’s debtor). There would be no business rationale to repay such VAT to the debtor, so most likely, to release itself from this liability, the factor would transfer these funds to the seller’s VAT account. But this in turn creates problems with the cash flows within the factoring arrangement.

Flow of funds in factoring

In classic factoring, the factor makes payment to the seller soon after receiving the invoice (or notice of the obligation), prior to receiving payment from the debtor. Thus at the time the factor pays the seller, the factor does not know whether the debtor will opt to use the split payment mechanism. Consequently, a situation may arise where the factor financing the gross amount of the receivable pays out to the seller’s ordinary account an advance of, for example, 85–90% of the gross amount of the invoice, and then receives funds from the debtor in split payment, with very limited access to the funds in the VAT account. Additionally, to release itself from the liability for the VAT payment (described above), the factor will prefer to transfer the funds from its own VAT account to the seller’s VAT account. This results in a significant gap, to the factor’s disadvantage, between the amount paid out to the seller (typically 85–90% of the gross amount of the invoice) and the amount received from the debtor which the factor can freely dispose of (i.e. the net amount of the invoice).

These cash-flow problems could be resolved in various ways. The simplest would be to finance only net amounts, but for obvious reasons many sellers would not be interested in such a limited service. The Polish zloty account could also be moved abroad, but this might not be cost-effective or beneficial to the parties’ relationships. The factor could also cover the difference described above out of a specially developed reserve or other security, but it would be hard to determine an appropriate amount which would not be too burdensome for the seller but would also sufficiently hedge the factor’s risk. Depending on the specifics of the transaction, there are also other possible solutions both limiting the risk on the factor’s part and solving the problem with differences in the amounts paid out by and to the factor in the event of split payment.


We will see in practice how split payment affects the factoring market. It is very possible that it will provide an additional spur for growth of the market due to increased interest in services of this type. Methods must still be developed for addressing the new risk for the factor as well as the potential discrepancy between the amounts of advances paid out and the amounts received by the factor which the factor can freely dispose of.

Patrycja Polasz, adwokat, Banking & Project Finance practice, Wardyński & Partners