There are strict rules which determine the time when VAT arises. This is called the “tax point” and it can be important because it can mean a difference of three months to when you have to account for VAT to HMRC.
Example – Acom Ltd’s next VAT return period ends on 30 June 2019. It makes a sale on 29 June and the tax point is on the same day. It must account for the VAT to HMRC for the June quarter (payable by 7 August 2019). But if the tax point for the sale had been just two days later on 1 July, it would not have to account for the VAT until the next return period, i.e. 7 November.
Rule for goods
In a simple case where goods are supplied to a customer in return for payment in full, the tax point is easy to determine. It’s either:
- The basic tax point – This is when the goods are supplied, i.e. when the customer takes them or you despatch them. The basic tax point is overridden by the actual tax point if that differs.
- The actual tax point – This is the earliest of when you issue an invoice (as long as that’s within 14 days of when the goods were supplied), or when he customer pays if that’s earlier than the basic tax point.
It sounds a bit fiddly but most of the time the way you do business will result in the tax point consistently falling under the same rule. However, there are exceptions, for example, where you despatch goods which customers have the right to return.
The tax point for goods that can be returned (other than because they are faulty) is different depending on the terms on which you provide them to your customer:
On approval – If a customer takes or you send goods on approval, you are not supplying (selling) the goods for VAT purposes and therefore there’s no tax point. This doesn’t change even if the customer pays but has the option of a full refund if they decide not to keep the goods or you invoice them. If the goods are accepted or cease to be returnable, the usual tax point rules then apply.
Tip – Review your terms and conditions for the sale of goods to make sure you’re not accounting for VAT when you don’t need to.
Trap – While there is no VAT to worry about for the goods, you may be required to account for VAT on the delivery costs.
Sale or return – Where you provide goods on a sale or return basis, the normal tax point rules, as explained above, apply. If the customer decides not to keep the goods and returns them, you should issue a credit note. This reduces the VAT you need to account for in the VAT period in which you issue the credit note or refund the customer, whichever is the earlier.