VATVAL13180 - Specific applications: Services incidental to supplies of goods: explanation of the “Rule of 78”

The rule works by adding together the number of each instalment payment, up to and including the final payment, to find the denominator of a fraction.

Example 1

Calculation after 1 out of 12 monthly instalments are paid.

12 + 11 + 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 78

After first instalment the factor is 12.

12/78 of the credit charge is paid.

Example 2

Calculation after 4 out of 12 monthly instalments are paid.

12 + 11 + 10 + 9 = 42

12 + 11 + 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 78

42/78 of the credit charge is paid.

Note: the same principle applies to any number of instalments, e.g. for 24 instalments, the denominator becomes 300. The first instalment contains 24/300 of the credit charge.