VAT 15% to 17.5%, client wants Invoice now, pay deposit & balance due in Feb

*Lexxy* · Dec 21, 2009

our customer has seen an article in the Times (point 2. grab tax breaks)over the weekend stating they can save money on the VAT increase by:

we raise an invoice for the total amount now, vat @ 15%
he'll pay a deposit now
balance due when we deliver goods (new windows), expected to be February

so this won't attract any vat @ 17.5%.

i couldn't see a problem with this but, i've just looked on HMRC for guidance & this is stated:

I receive a deposit of £100 on 20 December 2009 for a computer that retails for £1,000. The balance of £900 is paid when the computer is delivered on 10 January 2010. What rate of VAT is due?
[FONT=Arial,Arial]The deposit is received before 1 January 2010 so VAT of 15% is due:- £100 x 3/23 = £13.04 The balance is received after 1 January so VAT of 17.5% is due:- £900 x 7/47 = £134.04.

[/FONT]Another customer pays in full for a similar computer on 21 December which is due to be delivered on 11 January 2010. What rate of VAT is due?
[FONT=Arial,Arial]The payment is received before 1 January 2010 so VAT of 15% is due:- £1000 x 3/23 = £130.43.

so the info in the press is wrong? help? :|
[/FONT]

NextPoint · Dec 21, 2009

Why not split the invoice into two, so you have a different invoice for the two different payments? That way it will remain simple.

wood1e2 · Dec 21, 2009

Could you afford to invoice 31/12/09 and take full payment on delivery?

*Lexxy* · Dec 21, 2009

NextPoint said:
Why not split the invoice into two, so you have a different invoice for the two different payments? That way it will remain simple.

but the 2nd invoice will be VAT 17.5% which is what the customer is trying to avoid? sorry if i'm missing your point.

wood1e2 said:
Could you afford to invoice 31/12/09 and take full payment on delivery?

i had thought of this but, won't Mr VAT man be particularly hot on this scenario - i.e. the payment not coming in for over 2 months = VAT increase avoidance?

3pic · Dec 21, 2009

Example 1

A car dealer takes full payment on 31 December 2009 for a new car to be delivered to his customer on 1 March 2010. VAT is correctly accounted for at 15%, since none of the anti-avoidance rules apply and customer enjoys 2.5% discount but has to pay up front for goods he hasn't received as yet.

Example 2

A car dealer takes 50% deposit on 31 December 2009 for a new car to be delivered to his customer on 1 March 2010. VAT is correctly accounted for at 15% on the deposit and the remaining 50% payment is charged at 17.5% upon payment/delivery of the vehicle.

The key here is the payment being received which sets the tax point. The news article may be confusing the raising of an invoice with the creation of a tax point....but there are two tax points....a basic one and an actual tax point!

The basic tax point is the date goods are received/shipped or the date payment is made whichever is earliest. The basic tax point is deferred (and becomes an actual tax point) where an invoice is issued within 14 days of the supply being made (providing no payment has been received before the actual supply, otherwise the payment date is the tax point).

Where a tax invoice is not issued in the above circumstances (eg not issued within 14 days of the basic tax point) and payment is received after the supply has taken place, the accounting tax point is the basic tax point again....if the money is recevied in February then the basic tax point will be February and therefore at 17.5%.

*Lexxy* · Dec 21, 2009

thank you 3pic, although i will have to read a few more times for it to sink in, hopefully i'll get there!

BUT, i've just confused myself further as i'm drafting a letter to the customer & i've just 'found' some more info on HMRC that seems to say that this legislation WON'T apply to us anyway?!

"This note gives guidance on the VAT anti-forestalling legislation introduced as part of Finance Act 2009. The legislation is designed to restrict the extent to which a forestalling benefit can be obtained by the 15% rate of VAT continuing to apply to certain supplies of goods or services provided on or after 1 January 2010 when the standard rate returns to 17.5%.
The scope of the legislation is such that it is likely to affect very few businesses.

The legislation will affect you if you receive a payment or issue a VAT invoice [FONT=Arial,Arial]before [/FONT]1 January 2010 for goods and services that you are to provide [FONT=Arial,Arial]on or after that date [/FONT]and one of the following conditions is met:



[FONT=Arial,Arial]you supply the goods or services to a connected person (such as another business controlled by you); or [/FONT]
[FONT=Arial,Arial] [/FONT]
[FONT=Arial,Arial]you provide or arrange funding of your customer's payment; or [/FONT]
[FONT=Arial,Arial] [/FONT]
[FONT=Arial,Arial]you issue a VAT invoice to your customer that does not have to be paid in full within six months; or [/FONT]
[FONT=Arial,Arial] [/FONT]
[FONT=Arial,Arial]the payment or VAT invoice is in excess of £100,000, and this is not normal commercial practice. [/FONT]
The legislation may also affect you if, [FONT=Arial,Arial]before 1 January 2010[/FONT], you supply rights or options to receive goods and services from you [FONT=Arial,Arial]on or after that date, [/FONT]free of charge or at a discount.
Even then the legislation will not affect you if the recipient of your supply ("the customer") can recover the VAT on that supply in full.
If your business does not enter into arrangements of the type described above, and is not involved in any scheme to obtain a forestalling benefit for any person, you should be completely unaffected by the legislation and need read no further. "

this order doesn't meet any of the quoted criteria, so am i back to the beginning & it will be ok to do what the the customer originally requested?

gawd, my head is seriously spinning now!

*Lexxy* · Dec 21, 2009

result! a definitive answer from the VAT helpline

we don't meet any of the criteria for anti-forestalling so,

1) if we were to invoice now & take a deposit = 15% vat on deposit amount & balance would be at 17.5% vat as 2 tax dates are created (well done 3pic!)

2) invoice now & receive payment when goods delivered (providing this is not more than 6 months time) = vat at 15% on whole amount

i specifically requested that scenario 2 wouldn't be seen as artificial avoidance & he confirmed it wouldn't.

i'm going for a lie down now!

David Griffiths · Dec 21, 2009

*Lexxy* said:
this order doesn't meet any of the quoted criteria, so am i back to the beginning & it will be ok to do what the the customer originally requested?

As 3pic says, the anti avoidance rules don't apply, so you could have saved a head spin or two there!

However, the basic tax point rules are unaltered. If you take a deposit, in real money, before 31 December, that's got a tax point at the 15% rate.

It doesn't matter if you invoice the goods before delivery - the correct taxpoint will be the date of delivery, so that will be at the 17.5% rate.

I'd tell the customer that his idea is OK if he pays you the lot before 31 December. If he doesn't then split that VAT 15% on the deposit and 17.5% on the balance.

Yes, you could invoice the lot in December, but if there's an inspection and the VAT officer notices then it's you that will have to fork out the balance, not your customer. I bet he won't be very happy if you ring him up in two years and ask for more cash.

So the risk is all yours, and you don't make a ha'penny out of it. Hmmm.

David Griffiths · Dec 21, 2009

*Lexxy* said:
2) invoice now & receive payment when goods delivered (providing this is not more than 6 months time) = vat at 15% on whole amount

Don't trust ANYTHING from the VAT helpline unless you have it in writing. Seriously.

wood1e2 · Dec 21, 2009

*Lexxy* said:
i had thought of this but, won't Mr VAT man be particularly hot on this scenario - i.e. the payment not coming in for over 2 months = VAT increase avoidance?

I will have a look into this, as I am sure there are several companies out there that are doing this!!!

Maybe professional advice is needed then, speak to your accountant.

*Lexxy* · Dec 21, 2009

David Griffiths said:
Don't trust ANYTHING from the VAT helpline unless you have it in writing. Seriously.

i made sure i got a call reference & i was told all calls are recorded & details would be noted on our account so there wouldn't be ANY comeback.

slightly worried now you're saying that! :|

edit: going to ask them for confirmation in writing of what was discussed, we're not talking a huge amount here but better to be safe than sorry!

spidersong · Dec 22, 2009

David Griffiths said:
It doesn't matter if you invoice the goods before delivery - the correct taxpoint will be the date of delivery, so that will be at the 17.5% rate.

Actually I always thought it does, as per this from section 6 (4) of the VAT Act 1994;
"If, before the time applicable under subsection (2) or (3) above [the date goods are made available/service performed], the person making the supply issues a VAT invoice in respect of it or if,..., he receives a payment in respect of it, the supply shall, to the extent covered by the invoice or payment, be treated as taking place at the time the invoice is issued or the payment is received."

So if you issue an invoice prior to the basic tax point it fixes the actual tax point at the date of issue of the invoice, which is not then overidden by a basic tax point.

THe later parts of section 6 do not change this, and the ability to make regulations changing this only relates to 4 situations, none of which are relevant to this supply.

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VAT 15% to 17.5%, client wants Invoice now, pay deposit & balance due in Feb

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