When goods are sold under a form of credit agreement, the payments made by the customers are consideration for the supply of goods (VATable) and a supply of credit (VAT exempt).
The supplier normally, under the time of supply rules, accounts for VAT on the supply of goods in full upfront. If the customer fails to make the required payments the agreement is normally terminated and the suppler will want to make a bad debt relief claim.
To calculate the bad debt relief claim the payments made by the customer must be split between:
1Interest (i.e. VAT exempt credit element); and
2Capital (i.e. the taxable consideration for the supply of goods.