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Customs

12 December 2001
Issue: 3837 / Categories:

Bad debt relief

VAT bad debt relief can be claimed on supplies of goods made by way of hire purchase or conditional sale where the customer has defaulted. Supplies made by hire purchase or conditional sale have two components: a supply of goods and a supply of associated finance.

Bad debt relief

VAT bad debt relief can be claimed on supplies of goods made by way of hire purchase or conditional sale where the customer has defaulted. Supplies made by hire purchase or conditional sale have two components: a supply of goods and a supply of associated finance.

When determining how much bad debt relief can be recovered, the supplier in the past has had to allocate any payments received from the customer to the supply of the goods first and to the supply of finance only after the goods have been paid in full.

While believing that this is correct in law, Customs recognise that the outcome is unfair and therefore have decided to change the procedure with immediate effect, so that suppliers can allocate each payment received from defaulting customers to goods and to finance in the same ratio as the total cost of goods and the total cost of finance to the customer.

Suppliers can re-calculate previous bad debt relief claims by applying this new policy and submitting a voluntary disclosure. All claims will be capped to three years starting six months from when the payment was due from the customer.

With regard to repossessed goods, the disposal of these goods is subject to VAT where the customer has acquired the goods for a business purpose or where the supplier has changed their condition prior to re-selling them. Otherwise, the disposal of repossessed goods is relieved from VAT.

With immediate effect, where the disposal of the repossessed goods will be subject to VAT, suppliers no longer have to deduct the proceeds of the disposal from the outstanding debt of their customer, when claiming bad debt relief. Only the payments made by the customer have to be deducted.

There are no changes to the current policy where the disposal of repossessed goods will not be subject to VAT. In these cases, the proceeds of the disposal, as well as the payments made by the customer, must still be deducted from the outstanding debt.

(Source: Customs Business Brief 19/01 dated 6 December 2001.)

Issue: 3837 / Categories:
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