Tax point – What is a tax point?
The tax point of a transaction is the date on which the VAT becomes due.
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The tax point can also be known as ‘time of supply’. It’s included on VAT invoices and is important because it tells you:
- Which VAT period the transaction belongs to
- Which VAT Return to put the transaction on.
When is the tax point?
Normally, VAT must be accounted for in the VAT period in which the tax point occurs. It is therefore subject to the rate of VAT in force at that time. Small businesses may however account for their VAT in different ways. The tax point will vary depending on whether the business is invoice accounting or cash accounting for its VAT.
If you are invoicing accounting for VAT, i.e. you pay VAT to HMRC when you've invoiced your customers regardless of when they pay you, then the tax point is the same date as the VAT invoice. If however, you’re cash accounting for VAT, i.e. paying your VAT once the customer has paid you, then the tax point becomes the date when you receive the money.
Still, there are some exceptions. If a business supplies products or performs services more than 14 days before a VAT invoice is issued for those goods, then the tax point becomes the date that those goods were supplied. This is known as the basic tax point.
The 14 day rule
This rule means that a tax point is created when a VAT invoice is issued within 14 days after the basic tax point, i.e. when the goods were delivered or the services were first performed. If the invoice is completed within 14 days, this tax point overrides the basic tax point.
An example of a tax point
Suppose a person runs a consultancy business and records their VAT quarterly. Perhaps they work with a client for a mini project at the beginning of March, and the VAT quarter ends on the 31st. If they do not issue a VAT invoice to their customer until April 1st, because the work was completed more than 14 days before the VAT invoice was issued, the tax point is not the invoice date, but rather the date in March when the work was finished. This date is the basic tax point. This means that the invoice and the VAT it contains has to count towards the accounting of the first-quarter, ending on 31st March.
If however, the work was completed on March 25th and invoiced for on April 1st, the tax point would still be the invoice date. This is because, following the 14 day rule, the invoice date will override the date that the service was provided.
In most circumstances, the tax point will be either:
- The date the invoice was issued
- The date the payment was received
- The date the business provided its products or completed its services.