How and when to account for VAT if you offer your customers different payment methods, like instalments and deposits, and how to reclaim VAT you've paid on your purchases.
Your business might offer customers different ways to pay for goods or services. These may include:
- making advance payments
- paying in instalments
- credit sales, both with and without the involvement of a finance company
- periodic payments for continuous supplies
- security deposits for goods hired out
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.
Advance payments and deposits
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.
The tax point if you ask for an advance payment is whichever of the following happens first:
- the date you issue a VAT invoice for the advance payment
- the date you receive the advance payment
You include the VAT due 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, a further tax point is created when whichever of the following happens first:
- you issue a VAT invoice for the balance
- you receive payment of the balance
So you include the VAT due on the balance on the return for when the further tax point occurs.
You may ask your customers to pay a deposit when they hire goods from you. You don’t have to account for VAT if the deposit is either:
- refunded in full to the customer when they return the goods safely
- kept by you to compensate you for loss or damage
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.
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.
Using the cash accounting scheme
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.
Payments for continuous supplies
If you supply services on a continuous basis and you receive regular or occasional payments, 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 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 1 payment due. For each payment you should set out on the invoice:
- the amount of the payment excluding VAT
- the date the payment’s due
- the rate of VAT
- the amount of VAT payable
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 after the rate changed. If doing this reduces the amount of VAT due then you must issue a credit note to your customer.
Credit and conditional sales
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 tax point for a credit sale or a conditional sale is created at the time you supply the goods or services to your customer. This is the basic tax point and is when you should account for the VAT on the full value of the goods.
This basic tax point may be over-ridden and an actual tax point created if you either:
- issue a VAT invoice or receive payment before supplying the goods or services
- issue a VAT invoice up to 14 days after the basic tax point
If you use the cash accounting scheme, goods that you sell under credit sale or conditional sale agreements are excluded from the scheme.
Credit sales where you provide finance to your customer
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.
Additional fees relating to the goods, such as fees for transferring the ownership of the goods to the customer, are 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.
Credit sales involving a finance company
When you make credit sales involving a finance company, the finance company either:
- becomes the owner of the goods - for example when a purchase is financed by a hire-purchase agreement
- doesn’t become the owner of the goods - for example when a purchase is financed by a loan agreement
Hire purchase agreements
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.
Reclaiming VAT when you use different payment methods
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 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.