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HMRC internal manual

VAT Retail schemes guidance

HM Revenue & Customs
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Mail order traders: Bad debts: Part-payment of debts

For the purposes of claiming bad debt relief, it is important that any part-payments received from customers on outstanding accounts that include taxable and exempt supplies, and possibly outside the scope charges (such as recoverable court costs), are properly allocated. Payment should be allocated according to the Value Added Tax Regulations 1995, Regulation 170:

  1. where the customer asserts his legal right at the time of payment, and the consideration for the supply was made in full, he may indicate his preference as to how the payments should be allocated;
  2. where the customer does not state his preference for allocation of payments at the time payments are made:



  1. the business may allocate any payments received as it wishes provided that the order of allocation is clearly stated in its conditions of trading (for example “interest will be cleared first”);
  2. if, in its conditions of trading, the business does not expressly provide for allocation of payments, the payment falls to be allocated to the debts in the order in which the supplies were made.

In summary, any bad debt value calculation should include:

  • adjustments to exclude zero-rated supplies, exempt and outside the scope supplies,
  • debt recovery payments received, and
  • an adjustment to account for payments made by customer to agents but not forwarded by the agent to the mail order company.