VAT is accounted for in the return covering the tax point (time of supply). For most invoices that is simple: the date of supply, or the invoice date if the invoice is issued within 14 days. Advance payments and deposits change the picture, because money can arrive months before anything is delivered.
The basic and actual tax points
| Event | Tax point |
|---|---|
| Goods delivered or services completed | basic tax point |
| VAT invoice issued within 14 days after the basic tax point | invoice date (actual tax point) |
| Payment received or VAT invoice issued before the basic tax point | date of payment or invoice, whichever is earlier, for the amount covered |
The third rule is the one that catches advance payments.
Deposits and advance payments
A customer pays a 30% deposit when ordering a £10,000 (plus VAT) kitchen in March; installation happens in June.
- March: the deposit of £3,600 including VAT creates a tax point. Output VAT of £600 goes on the return covering March.
- June: the remaining £8,400 including VAT is taxed at the June tax point (or the invoice date if invoiced within 14 days).
This applies whether or not a VAT invoice is issued for the deposit. Issue one if the customer is VAT registered and wants to reclaim the VAT.
Refundable security deposits are different
A deposit taken purely as security that will be returned when the hired item comes back undamaged is not payment for the supply and is outside the scope of VAT. If it is kept, the treatment depends on why: compensation for damage is normally outside the scope, while a forfeited deposit that is really part of the price is taxable.
Pro forma invoices
A pro forma (a request for payment that is not a VAT invoice) does not create a tax point. Mark it clearly “This is not a VAT invoice” and issue the VAT invoice when payment arrives. Otherwise the business may have to account for VAT on an invoice the customer never pays.
Continuous supplies
For ongoing services billed periodically, such as maintenance contracts or leases, each payment or VAT invoice creates a tax point, whichever comes first. An annual invoice raised in advance makes the whole year’s VAT due in that period. Some businesses issue an annual “request for payment” instead and a VAT invoice as each payment is received.
Cash accounting and the flat rate scheme
Under cash accounting the tax point is simply the date of payment, so deposits are taxed when received anyway. Flat rate scheme users apply their percentage to the deposit in the period of receipt.
Ledger treatment
Post a customer deposit to customer prepayments (a liability), with the VAT to output VAT at the tax point. The sale is recognised in the profit and loss account when the work is done, but the VAT is already paid. Mixing the two timings is a frequent cause of VAT control account differences.
For the bookkeeping side see customer prepayments in the chart of accounts; HMRC’s rules are in VAT Notice 700.