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Math lady meme What is the tax point? Tax Accountant Answers

A question which gives rise to a series of questions

Recently, a client asked me an intriguing question as to why more and more suppliers are issuing invoices with “This is not a VAT invoice” marked clearly on the document. This gives rise to a series of questions, including what does this mean in terms of VAT, what is the benefit to the supplier of doing this and how does the recipient of the invoice account for it?

What is the Tax Point?

VAT is heavily driven by the tax point, the date when VAT must be declared on the VAT return. The default position with goods is when they are shipped and with services it is when they are performed.

The basic tax point can also be overridden by an actual tax point, which can be created before or after the basic tax point.  An earlier tax point arises if the supplier issues a VAT invoice or receives a payment in advance of the basic tax point and a later tax point will arise if the supplier issues a VAT invoice within 14 days after the basic tax point.

‘Proper’ VAT invoices

Under VAT regulations, a tax point can only be created by the issue of a “proper” VAT invoice, which in essence means that the invoice has to show name and address of supplier and customer, description of goods or services supplied, the supplier’s VAT number, tax point/date and the VAT rate applicable.

In reality, most supplies are subject to an actual tax point created by the issue of a VAT invoice or receipt of a payment (or both). The basic tax point plays a pivotal role in determining the legal basis for an actual tax point. If for some reason an invoice is not issued or payment is not received, or they are delayed, the time of supply will, in most cases, revert to the basic tax point.

This is not a VAT invoice

So, back to the original question, why Issue an invoice that states “this is not a VAT/tax invoice”? In theory this does not create a tax point because it is not a VAT invoice and so the tax point shifts to when the invoice is paid. Once paid, the supplier must then issue a proper VAT invoice to the customer (usually on request).

For example, if you supply a goods order on 30th June, as a supplier you have to declare VAT in the June quarterly VAT return as the invoice is dated 30th June. But if you’re paid for this invoice on 10th July and have only issued a “This is not a VAT invoice” invoice, then you can declare this sale on the next quarter. The initial invoice did not create a tax point and the receipt of money is the new (actual) tax point, so the business benefits from three months’ VAT cashflow.

This approach is also seen with pro-forma invoices, which also do not create a tax point. Once the customer pays, this then creates an actual tax point and a proper VAT invoice must be issued. Issuing this proper VAT invoice means the supplier now needs to declare output tax to HMRC and the customer, if eligible, can reclaim VAT.

In reality, it makes very little difference whether a firm goes the pro-forma route or the “This is not a VAT invoice” route, both achieve the same result, shifting the tax point to the date when payment is received. Both require the issuing of an initial document (pro-forma/not an invoice) followed by a proper invoice, so there is more administration required, but in doing so there are potential cashflow benefits.

Tax Point: The benefits

For goods, the benefits to most suppliers are negligible, as these days, most businesses require payment before goods are shipped, so the actual tax point is clear. But when goods are shipped on account, the supplier must issue a proper invoice within 14 days of shipping or on receipt of payment, whichever occurs first.

For services, the benefits are that the supplier can delay paying output tax on their supply until such time as the customer pays the invoice. It is no different to issuing pro-forma followed by a proper VAT invoice. Pro-formas are usually used in a business-to-business context (known as interim certificates in the construction industry) and are documents that do not create a tax point until payment is made. The clear benefit for the supplier is that he/she is not handing over 20% VAT and thus improving their cashflow.

“This is not a VAT invoice” is mostly seen in the business-to-consumer sector, the most common example being mobile phone contracts, which are often taken out in the personal name of a director or employee and then claimed via expenses. For the mobile phone network their customer is an individual, not a business, the network issues a “not a VAT invoice” document and needs only declare output when the customer pays.

If you look at your Sky/Virgin/BT TV invoices or your home telephone/mobile you will see similar “not a VAT invoice” wording. Of course, as a consumer, these suppliers are not expecting the customer to ask for a VAT invoice, nor do they have to supply one automatically but must if requested by the consumer.

Tax Point: The negatives

These rules are available to all VAT-registered businesses. However, issuing a pro-forma followed by a proper invoice or a “not a VAT invoice” does come at a cost with an additional administrative burden for the supplier, which historically can be significant.

The good news is that with the increasing popularity of cloud/accounting flexible software, in most cases it’s a lot easier to issue pro-forma, requests for payments, interim certificate through the software and then issue follow up proper invoices afterwards, than was perhaps possible in the old days when invoices had to be typed by hand or produced manually in Word.

Tax Accountant’s view

The increasing popularity of pro-forma/not an invoice accounting, merely reflects the tight margins that many firms are operating under these days, with any opportunity to improve cashflow seized upon.

Finally, I’m sure that you will understand that because of the festive season being upon us, this will be the last Blog until January 6th. So happy Christmas and a more prosperous new year to everyone!