You supply services to your customers under continuous contracts. Occasionally you need to supply goods with the services. As the rules for accounting for VAT differ, must you invoice your customers separately for each type of supply?
VAT tax points
HMRC has strict rules for deciding when a business must account for VAT on the supplies it makes. This trigger date is called the “tax point”. The tax point for goods is the date you provide them to your customer. For services it’s the date you complete the work. These are overridden if you issue an invoice to your customer earlier or you receive payment from them.
Note. There are modifications and exceptions to the general rules, for example, where the 14-day invoicing rule applies, or for stage payments in the construction industry.
Continuous supplies
Once common situation where the general tax point rules don’t apply is if you make continuous supplies of services. For example, if you’re an accountant providing day-to-day bookkeeping services. For this and other continuous services the tax point is when you issue an invoice. This means you could complete a number of different services over, say, the course of a year, but the tax point is when you bill your customer, or if earlier, when they pay you.
Trap. A service isn’t continuous just because it’s provided over a long period. You must have an agreement or contract for ongoing services.
Tip. Delaying your invoices defers having to account for VAT, but also when you get paid. However, you can get the best of both worlds if you issue a “request for payment” instead of a formal VAT invoice. Only when the customer pays you do you need to issue them with a VAT invoice.
Goods and services
As the name suggests, the continuous services rule only applies to services. If you frequently make supplies of goods to a customer, each supply triggers a tax point under the general rules. But if you supply goods in the course of supplying services, and bill your customer on a single invoice the tax point can be trickier to determine.
Example 1. Acom provides ongoing IT hardware and software support to its customers. One asks Acom to upgrade its network. This involves supplying goods such as cables, routers etc. As the supply of the goods is secondary to the main supply, which is the service of installing the new network, the goods are fundamentally part of the service, i.e. Acom can’t provide the service without the goods. This is known as a composite supply and the tax point is that relating to the main supply rules, i.e. the continuous service.
Example 2. Bcom provides bookkeeping services. One of its customers asks Acom to provide a new computer and install new accounting software on it. The supply of a computer, while vital to the services Bcom supplies is not fundamentally part of them. It’s a supply of goods in its own right. The basic tax point rules apply for the supply of the computer, i.e. goods. To avoid trouble with HMRC, Bcom should bill its customer for the computer soon after supplying it, and account for the VAT on its next quarterly return.
In summary, if you make continuous supplies of services, e.g. bookkeeping, you only need to account for VAT when you bill your customer or, if earlier, they pay you. If you supply goods linked to the services, the same rule applies. But if you supply unrelated goods you must account for them in the VAT period you supply them.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.