VATVAL13160 - Specific applications: Services incidental to supplies of goods: credit charges
General - the granting of credit on a supply of goods or services or the provision of instalment credit finance in a hire purchase agreement is an exempt supply provided that a separate charge is made and disclosed to the recipient of the supply.
Premature ending of an agreement governing a supply of goods - where an agreement is ended prematurely (e.g. due to early settlement, or default and repossession of the goods) a trader may claim that the original credit charge has been reduced. »Ê¹ÚÌåÓýapp method commonly used by credit traders to apportion instalments between payment for the goods and for the credit is known as the “Rule of 78â€�. This is explained fully below. You can accept this method or any other method that traders use consistently as a means of determining the element of exempt credit, providing the apportionment is on a fair and reasonable basis.
Penalty charges - if a penalty is imposed upon customers for late payment, the penalty does not represent consideration for any supply and is outside the scope of VAT.