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HMRC internal manual

VAT Bad Debt Relief

Payments: What constitutes a payment?

Payments are defined in regulation 165 as:

Any payment or part-payment which is made by any person by way of consideration for a supply regardless of whether such payment extinguishes the purchaser’s debt to the claimant or not.

The typical form of payment would be a monetary payment by the customer. The regulation, however, is widely drawn and includes a number of other forms of payment:

  • any non-monetary payments, for example, goods or services provided in exchange;
  • third party payments received;
  • payments received from a guarantor of the customer;
  • mutual debts are treated as a payment with relief available on any amount remaining after offsetting amounts owed to the customer;
  • the value of any enforceable security is treated as a payment;
  • payments made by the customer’s insurers (for example where part or all of a repair bill at a garage is paid by the customer’s insurer).

If a business takes out an insurance or similar policy to pay out in the event of their customer’s debt going bad, this does not constitute a payment for the purposes of establishing whether it can claim bad debt relief.

In AEG (UK) Limited 1993 (VTD 11428) the Tribunal found that shares provided in settlement of an outstanding amount constituted full payment and thus no bad debt relief could be claimed. The share certificates were issued following a meeting of the customer’s creditors and a majority of the customer’s creditors had accepted this in settlement. The supplier, who had voted against the terms of the settlement, had sought to claim that the share certificates received were worthless.