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HMRC internal manual

VAT Bad Debt Relief

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HM Revenue & Customs
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Payments: VAT groups containing a supplier of goods or services and a finance company.

The cases referred to in VBDR2400 concern supplies of goods and credit by the same company. It should be noted that regulation 170A has a limited scope. It only applies to allocations of payment for sales under hire purchase, conditional sale or credit sale agreements. These types of agreements provide for the purchase price to be paid by instalments.

The following examples do not fall under the terms of regulation 170A, as it is not known at the time of the supply of the primary goods or services whether any, or how much, interest will be incurred. There will also not be a set number of instalments for the price to be paid over. Typically the arrangements described below will be of ‘running account credit’ or ‘revolving credit’.

Where a credit card is used to pay for goods and services and the finance company (F) providing the credit card is not in the same VAT group as the supplier (S) of the goods or services paid for, the use of the card would discharge the customer’s liability to the supplier (S).

Where a VAT group contains both the supplier (S) and a finance company (F), bad debt relief may be available if the customer fails to pay all amounts due. An example of this situation would be a VAT group containing a retailer and a finance company offering a store-branded credit card.

The Kingfisher High Court case (1994, STC63) established that in such circumstances the use of a credit card provided by a member of the same VAT group as that containing the supplier of the goods or services should be seen as self-financed sales on credit.

If a customer does not pay the full balance within an agreed period of time, interest charges for the supply of credit may become due. Where a customer defaults after receiving supplies of both the goods (or services), financed by the use of the credit card, and credit, represented by interest charges, payments should be allocated according to regulation 170(2). The resulting outstanding amount for each supply and VAT rate charged on it will then form the basis of any bad debt relief claim.