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HMRC internal manual

VAT Time of supply

Actual tax points: payments: receipt by the supplier

Restriction in access to payment

For a long time it was believed that a payment tax point could not be created unless the payment was freely available to the recipient, that is to say it was unfettered. That view was changed by a Court of Appeal decision which, although it comprised four different appeals by different parties, is generally referred to as Faith Construction Ltd ([1989] STC 539). Faith and one of the other appellants (West Yorkshire Independent Hospital (Contract Services) Ltd), devised similar schemes under which they received payment of the contract price and immediately loaned the money back,either directly or indirectly, to the customer. The loans were then repaid as work proceeded.

The other appellants (Dormers Builders (London) Ltd and Nevisbrook Ltd) set up arrangements under which payments were made by customers into company bank accounts but under terms which ensured that Dormers and Nevisbrook could only gain access to that money if the work was performed satisfactorily. For example, in Nevisbrook the only signatory to the account was the customer.

The Court of Appeal, in upholding earlier High Court decisions, rejected our argument that payments in either of these circumstances had not been genuinely received for VAT purposes.

The principle that has emerged from these decisions is that a payment may be regarded as having been received by the supplier for VAT purposes when the customer has done whatever is contractually required to be done to effect payment. As a result the supplier no longer has the right to sue for payment. This includes circumstances, such as applied in the above cases, where the customer is required to do something that falls short of the unfettered or unconditional type of payment that might normally be expected. The up-side of this has been to severely restrict claims that a payment has not been received for VAT purposes. With few exceptions the creation of a tax point cannot now be avoided by simply crediting a payment to a separate bank account or by allocating the money to a suspense account in the accounting records.

Assignment to third parties

A payment received by somebody acting on behalf of the supplier (for example an agent)or where it is made to somebody under the instructions of the supplier (for example aperson to whom the supplier owes money) is nevertheless still ‘received’ by the supplier for time of supply purposes. However, circumstances may arise where the right to receive the payment for a supply is legally assigned to a third party. This can occur under certain factoring arrangements. Regulation 94A of the VAT Regulations 1995 (see VATTOS2380) confirms that payment by the customer in these circumstances is treated as received by the supplier.

It should be noted, however, that this only applies to tax points arising under the time of supply regulations (see VATTOS2300). This is due to the fact that, if a VAT invoice were not issued (for example where the supply is to somebody who is not registered for VAT) assignment of the payment to a third party could lead to a tax point not arising. However, this is not an issue for supplies subject to the normal tax point rules under section 6 of the VAT Act 1994 (see VATTOS2200), as the absence of a payment or VAT invoice means that the time of supply reverts to the basic tax point.

See also VATTOS6600 for information about accommodation tax point arrangements that are available in these circumstances.