Actual tax points: payments: set-off
A payment tax point can be created by setting-off mutual debts. This might be achieved for example by book entry or as an adjustment to the accounting records. Supplies, for example management services, between associated companies are often paid for in this way. Unless a tax point has already been established by the issue of a VAT invoice, the appropriate entries in the accounting records will represent a payment tax point for the supply. This was confirmed by the Tribunal in the case of Pentex Oil Ltd (VTD7989& 7991). Pentex Oil Ltd provided technical services to associated companies which amounted to continuous supplies of services. The Tribunal held that corresponding credit and debit adjustments in the accounting records of the appellant company and the associated companies respectively, represented payment for VAT purposes. As these adjustments were made before the issue of a VAT invoice, they created the tax point for the supplies.
The general principle of payment by set-off was endorsed by the High Court in Enron Europe Ltd ( STC 1339).
It is important to remember that for there to be a payment tax point, the debt must actually have been settled or expunged. In other words the amount involved must no longer be outstanding. Entries that simply reflect or acknowledge an outstanding debt should notbe regarded as evidence of payment for tax point purposes.
In some cases the value of a continuous supply of services may not be agreed until the annual accounts of each business are drawn up. The date the accounts are approved may betaken to represent a payment tax point where they demonstrate that the supplies have been paid for by way of adjustment to each company’s accounts. The same principles apply here as they do to payments by, say, book entry - payment cannot be said to have been received if the accounts merely identify the supply in the profit and loss account as having been made/received. To create a tax point based on the date the accounts are approved, it is necessary for those accounts to also demonstrate that the debt has been discharged. This cannot be the case if, for example, the amount in question is also shown as an outstanding item on the respective balance sheets under debtors/creditors. An assessment should never be issued on the evidence of an entry in the profit and loss account alone.