HMRC internal manual

VAT Time of supply

VATTOS5170 - Actual tax points: payments: retention payments

Some contracts provide for payment of part of the contract price to be delayed for a set period pending confirmation that the supplier has satisfactorily completed the contract. The amount held back by the customer is often referred to as a retention. This is a common feature of construction contracts and contracts for the supply and installation of plant and machinery.

Invariably the retained amount will not be invoiced for, or paid, until after the basic tax point for the supply has passed. Under the normal rules the VAT would fall due on the retained element of the contract price at the basic tax point. However, regulation 89 of the VAT Regulations 1995 (see VATTOS2350) applies in these circumstances. Consequently (apart from supplies of construction services falling within the scope of regulation 93 (see VATTOS9120) the tax point for retentions is delayed until either a VAT invoice is issued or payment of the retention is received, whichever is the earlier. It must be stressed that this only applies to the retained element of the contract price. The rest of the supply is subject to the normal tax point rules.