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Your business might offer customers the option to pay for goods and services in different ways. These include:
You might also ask your customers for a deposit as a security if you hire out goods to make sure they're returned to you in good condition.
This guide explains how and when to account for any VAT that's due and how to reclaim VAT you've paid on your purchases.
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A tax point is the date you have to account for VAT on the sale of goods or the supply of services. There are different types of tax points and you'll need to make sure you get the right transaction on the right VAT Return.
You need to account for VAT correctly on deposits and advance payments you receive from your customers.
Sometimes you might ask for an advance payment, or a deposit:
You might also ask for a returnable deposit to make sure items you hire out are returned to you safely and in good condition. You could even request a deposit from your customer where it's not refunded to them if they don't buy the goods or use the services you're offering.
If you use the Cash Accounting Scheme you'll account for the VAT when you receive payment from your customers unless it's a returnable deposit - see 'Returnable deposits' below.
An advance payment, or deposit, is a proportion of the total selling price that a customer pays before you supply them with goods or services. If you ask for an advance payment, the tax point is whichever of the following happens first:
You include the VAT on the advance payment on the VAT Return for the period when the tax point occurs.
If the customer pays you the remaining balance before the goods are delivered or the services are performed, another tax point is created when whichever of the following happens first:
So you include the VAT on the balance on the return for the period when the tax point occurs.
A customer wants to buy a bicycle from you. The total price is £200 including VAT and they pay you a deposit of £50 (including £8.33 VAT) on 1 July. You account for the £8.33 VAT on the return that covers 1 July.
Before delivery your customer then pays you the balance of £150 (including VAT of £25) on 1 December and you account for the VAT of £25 on the return that covers 1 December.
You may ask your customers to pay a deposit when they hire goods from you to make sure they bring the item back safely. No tax point is created - and you don't have to account for VAT - if the deposit is either:
If you ask your customer for a deposit against goods or services but they then don't buy them or use the services, you may decide to keep the deposit - usually you've told your customer about this in advance and it's part of the conditions for the sale. This is called a 'forfeit' deposit. For example, hotels often ask for a deposit against a room, and may keep part or all of the deposit if the customer doesn't turn up.
You should declare VAT on the deposit when you receive the payment or when you issue the VAT invoice, whichever happens first.
If you keep the deposit because your customer changes their mind about the goods or service and doesn't want them any more, there is no VAT due. If you have already declared it on your VAT return then you need to show it on the next one as an adjustment.
If you supply services on a continuous basis and you receive payments regularly, or from time to time, a tax point is created every time you issue a VAT invoice or receive a payment, whichever happens first.
If the payments are going to be made regularly - for example by Direct Debit - you can issue a VAT invoice at the beginning of any period of up to a year for all the payments due in that period, as long as there's more than one payment due. For each payment you should set out on the invoice:
If you decide to issue an invoice at the start of a period, you don't have to account for VAT on any payment until either the date the payment's due or the date you receive it, whichever happens first.
The same procedures apply to continuous supplies of goods, in the form of water, gas and electricity.
If there's a VAT rate change during the period covered by an invoice for continuous supplies, you can declare VAT at the new rate on the part of the supply of goods or services you made after the rate change - even though the normal tax point happened earlier. For example, where a payment is received before the goods or services are supplied.
If you decide to do this then you should declare VAT at the old rate on the value of the goods supplied or services performed before the change in rate, and at the new rate in the value of goods supplied or services performed after the rate changed. If doing this reduces the amount of VAT due then you must issue a credit note to your customer.
A 'credit sale' means the sale of goods which immediately become the property of your customer but where the price is paid to you in instalments. A 'conditional sale' is where you supply goods to a customer but the goods remain your property until they are paid for.
The basic tax point for a credit sale or a conditional sale is created at the time you supply the goods or services to your customer, which is when you should account for the VAT on the full value of the goods. But the basic tax point may be over-ridden and an actual tax point created if you either:
If you use the Cash Accounting Scheme, goods that you sell under credit sale or conditional sale agreements are excluded from the scheme.
If you offer goods on credit to your customer and you don't involve a finance company, you're financing the credit yourself. If you show the credit charge separately on the invoice you issue to your customer then it will be exempt from VAT. Other fees relating to the credit charge such as administration, documentation or acceptance fees will also be exempt. You declare VAT on the full value of the goods that you've supplied to your customer on the VAT Return for that period.
If you charge your customer additional fees that relate to the goods - like fees for transferring the ownership of the goods to the customer - they're only exempt if the charge for them is £10 or less.
You might supply goods or services on interest free credit by arranging with your customer for them to pay over a set period without charging them interest. In this case you declare VAT on the full selling price when you make the supplies.
When you make credit sales involving a finance company, the finance company either:
If the finance company becomes the owner of goods, you're supplying the goods to the finance company and not your customer. You don't make a charge for providing the credit. So you account for VAT on the value of the goods at the time you supply them to the finance company. Any commission that you receive from the finance company for introducing them to your customer may be subject to VAT.
If the finance company doesn't become the owner of the goods, you're supplying goods directly to your customer. You're not supplying them to the finance company, even though the finance company may pay you direct. VAT is due on the selling price to your customer, even if you receive a lower amount from the finance company. The contract between your customer and the finance company for credit is a completely separate transaction.
If you want to reclaim VAT on payments you've made to your suppliers you need to have a valid VAT invoice or receipt.
If a supplier gives you an invoice that covers several payments - or perhaps an invoice showing monthly payments due in the forthcoming year - you can only reclaim the VAT on the date each payment is due or the date you send the payment, whichever happens first.