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HMRC internal manual

VAT Time of supply

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HM Revenue & Customs
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Actual tax points: payments: payment under a separate loan agreement

You may encounter claims that a payment, apparently received in connection with a supply, is not in fact payment for the supply but is the result of a separate loan agreement. This was a further feature of the case involving Mercantile Contracts Ltd(VTD 4357) (see VATTOS4330). The company under took refurbishment work for an associated company. In considering when the basic tax point for the supply occurred, the Tribunal were required to establish the status of various payments made by the customer as the work proceeded. These were either directly to the company or to the company’s suppliers. The Tribunal accepted the claim that these payments were made under a separate loan agreement and thus did not create tax points forthe supply of building services.

Similar claims should therefore not be dismissed lightly. Nevertheless, the tax payer must provide evidence to substantiate the existence of a loan agreement. Although this might not amount to a written agreement, it is not unreasonable to expect existence of the loan to be supported by correspondence, minutes of board meetings, or other contemporary records. In the absence of satisfactory evidence you may normally take the view that the amounts represent payment for the supply.