VBDR2430 - Payments: Example of attribution for goods supplied with finance under hire purchase, conditional sale or credit sale agreements: The new method
The amended regulation 170A reflects the apportionment made by businesses between capital and interest on a commercial basis, which is calculated within their records. If the apportionment has been correctly calculated by businesses, typically using an actuarial or Rule of 78 accounting basis, the method set out in the legislation will produce the same figure. The new method of calculation therefore provides a means of checking that the records already in place and being used by businesses to calculate the apportionment are indeed accurate.
The values are calculated as follows.
Example
For the purposes of this simple illustration the same scenario has been adopted as in VBDR2420 – a one year term with interest of 20%. The interest has been calculated using a “rule of 78” basis, and it has been assumed that there was no interest accruing in respect of unpaid instalments.
Payments made on or before the termination of the agreement must be attributed to the supply of credit by multiplying the amount of the payment by the fraction A/B and the balance is attributed to the supply of goods. “A” is the total of the interest on the credit provided under the agreement, less any rebate of interest granted and any interest attributable to any unpaid instalments prior to the termination; and “B” is the total amount payable under the agreement (the total of “A” plus the total for the goods).
Calculation of “A”
| Description | Amount |
|---|---|
| Total charge for interest paid under the agreement | £ 1,800.00 |
| LESS rebate of interest granted | (£ 1,038.46) |
| LESS interest attributable to any unpaid instalments | (£ 0.00) |
| Total deducted | (£ 1,038.46) |
| Total Interest Due | £ 761.54 |
Calculation of “B”
| Description | Amount |
|---|---|
| Total amount payable under the agreement (total for the goods + total of “A”) (£10,000 + £761.54) | £10,761.54 |
| LESS any reduction as a result of termination | (£ 0.00) |
| LESS amounts on which interest was not charged (e.g. fees, deposits) | (£1,000.00) |
| LESS any capital value unpaid at the time of termination | (£7,061.54) |
| Total deducted | (£ 8,061.54) |
| Total Amount Payable | £ 2,700.00 |
The calculation then continues:
| Description | Amount |
|---|---|
| Payments made on or before termination (P) x (A/B) = Interest element (I) | 2,700 x 761.54/2,700 = £761.54 |
| Payments (P) minus interest element (I) = Goods value (G) | 2,700 - 761.54 = £1,938.46 |
| Amount financed minus the goods value (G) = Bad debt relief amount | 9,000 - 1,938.46 = £7,061.54 |
| Bad debt relief amount x 7/47ths = Bad debt relief claim. | 7,061.54 x 7/47 = £1,051.72 |
Note: The bad debt relief amount should be the same as the outstanding capital value shown in the records, which should have been calculated by reference to the actuarial or Rule of 78 method in place.
In practice it is likely that there will have been an adjustment to the original price paid under regulation 38, and this needs to be taken into account when carrying out the bad debt relief calculations. No bad debt relief is allowable in respect of an agreed reduction in the price.