Tax Points

What creates a tax point and is it possible to postpone it?

Goods

If you supply goods the tax point is either receipt of payment or the creation of a tax invoice, whichever is sooner.

If it’s the latter that creates the tax point then as long as full payment is received there shouldn’t be any negative effects on cash flow. This is because the customer will have already paid the VAT accounted for.

However you should avoid raising a tax invoice for an advance payment or an invoice before the goods are delivered, as this would create a tax point. However a solution is to send a request for payment or a pro forma. Make sure not to include a VAT number and have ‘This is not a tax invoice’ written clearly upon it with a gross sum and not a net figure. Then upon receipt of payment you can raise a tax invoice.

It would seem that you could now just issue a pro forma to defer the tax point even after the delivery of the goods, however a tax invoice must be issued within 14 days of the goods been delivered, unless you have an extension from the VAT man. Unfortunately this can also lead to cash flow problems if your customer takes extended credit.

Also remember to look at your business terms to see if there is anyway to ease cash flow problems. If payment is required within 30 days and enforced strictly, then hopefully all VAT charged will have received before your payment to the VAT man (30 days after you’re the end of your VAT period).

Services

The tax point is usually when the service was performed. The same rules apply to services as goods, - the tax points and the date VAT falls due being the earlier of the raising a tax invoice (within 14 days of the service being performed) and the date payment is received.

On occasion you may need to invoice in advance, maybe to cover a major or contract that will last months or such like. Under an agreement for separate and successive supplies of services, successive payments may be required. Luckily a tax invoice can cover up to one year and be raised at the beginning of any period of the agreement, however it must show the dates on which payments are going to be made, the VAT exclusive amounts payable and the rate and amount of VAT due to each payment.

If you decide to use this method then the VAT will have to be accounted for either each time a payment is received or when the payment falls due (whichever happens first).

Advice

If you supply goods or services within the final days of a VAT accounting period then, it may be a good idea to raise the tax invoices in the early stages of the next period provided the 14-day limit is met.