Payment for goods received on last day of quarter but refunded the next - what options are open here?

Payment for goods received on last day of...

Didn't find your answer?

Client issued a pro-forma invoice for goods.  The customer paid for the goods upon receipt of the pro-forma on the last day of the VAT quarter.  The customer subsequently changed his mind and a refund for the full amount is due in the next VAT quarter.

Client does not wish to pay the VAT as he does not have the cash flow for it (he has paid the customer back the proceeds in full). Can we do anything to help him (legally) here?  Obviously non disclosure is the easiest way out but not only would the fine be hefty it would surely also be a criminal offence.

My suggestion is to enter the sale on the VAT return in full thus avoiding any non disclosure penalties and then sending payment to HMRC for the difference between the amount on the VAT return and the amount of the customers payment.  HMRC would be x amount short but the fines for late payment would be nowhere near the fines for non disclosure.

Thoughts?

Replies (16)

Please login or register to join the discussion.

Routemaster image
By tom123
20th Oct 2014 13:18

Did the goods get delivered and then returned?

If the goods did not in fact get delivered, then there is no supply. The two transactions (payment and then refund) would then not be relevant to VAT.

Thanks (1)
avatar
By dwnorfolk
20th Oct 2014 13:29

No, goods were never delivered.

But if client is on cash accounting, as at the date of the VAT return, it would not have mattered if the goods were delivered or not, output vat would need to be declared on what was effectively a 100% deposit no?

Thanks (0)
Routemaster image
By tom123
20th Oct 2014 14:34

I still think there would have needed to be a supply somewhere in the transaction to make it vatable.

In your example, goods are ultimately delivered to make the transaction vatable, even though delivery takes place later.

All you have is a movement of money around.

Thanks (1)
Replying to kiwilondon99:
avatar
By dwnorfolk
20th Oct 2014 14:52

FL Memo says the following about deposits (which an advanced payment effectively is):

"VAT on deposits which represent an advance payment must be accounted for when the deposits are received or paid.  If the deposit is refunded then the VAT originally accounted for can be reclaimed".

 

Thanks (0)
avatar
By Gem7321
20th Oct 2014 14:58

What is the FL Memo?

 

And it doesn't clarify when the VAT can be reclaimed if it spans a VAT quarter.

 

The Time of Supply rules state that the date the payment received is the tax point so I don't think you would get away with saying there was no supply. 

 

I'm not sure what the answer is, just putting in my 2p worth!

Thanks (1)
Replying to DouglasN:
avatar
By dwnorfolk
20th Oct 2014 15:11

FL Memo/Indicator are a well known publishing company that produce handbooks to various professions.  The passage I quoted is from their VAT manual.

 

It doesn't clarify when the VAT can be reclaimed but if the client is cash accounting then I assume it is on the date payment leaves the bank account.

 

 

Thanks (0)
Routemaster image
By tom123
20th Oct 2014 15:10

Earlier of -etc

The tax point is the earlier of: (generally)

Delivery of goods,

Date of invoice

Payment

 

but surely that is only relevant where there are ultimately all three components somewhere.

Just paying over money, and then returning it, cannot create a vatable supply of goods in my opinion.

Thanks (1)
Portia profile image
By Portia Nina Levin
20th Oct 2014 15:13

I agree with Tom123

It is cash accounting.

If you receive an amount of money and then pay it back almost immediately that is not a deposit as such.

There is no supply, and so the tax point is an irrelevance.

The money received is not consideration for any actual supply, so the way that you account for it is simply not to, rather than just blindly following cash movements.

Thanks (1)
Replying to Matthew Cock:
avatar
By dwnorfolk
20th Oct 2014 15:29

The problem is it spans two VAT quarters.  The money received is in quarter 1, the money is paid back in quarter 2.  I can see no guidance from HMRC to indicate what length of time between the two is acceptable to say "it is no deposit as such"

 

 

Thanks (0)
avatar
By PracticePartner
20th Oct 2014 15:16

If the request for payment is really a Proforma ....

Then its as tom123 describes above.

A proforma invoice is not a VAT invoice. To quote from the VAT Manual:

"Pro-forma invoices should always be clearly described as such and should preferably be endorsed “This is not a VAT invoice”. If this has been done no VAT transaction takes place for either party until the goods are shipped and a proper VAT invoice is raised.

If the client has incorrectly issued a VAT invoice when they should have issued a proforma they should issue a credit note (and logically then issue a correct proforna but in this case as they have already refunded the client there isn't much point). As they are correcting an error I think it would be acceptable to date the credit note the same as the original invoice.

In general I would caution against advising the client to underpay the VAT, as they could find themselves in a default period unless they have a clean record of prompt compliance and payment. And if this happens due to the client acting on your advice he could make a claim against you. If funds are short the client should contact HMRC before the filing deadline and ask for time to pay.

Thanks (1)
Replying to SXGuy:
avatar
By dwnorfolk
20th Oct 2014 15:33

Practice Partner -

From HMRCs VAT manual:

"Output tax

If the issuer of a pro-forma invoice subsequently receives payment and/or makes a supply, a full VAT invoice must be issued within 30 days. The tax point will follow the normal rules."

 

Payment was received so it has to follow the "normal rules" - ie the tax point becomes the date payment is received.

 

Thanks (0)
avatar
By Gem7321
20th Oct 2014 15:39

We've established that the date the payment is received is the tax point, but the OP's client has 30 days to actually issue the VAT invoice. 

 

I would be inclined to say that if the VAT invoice had not been raised then treat as tom123 suggested, but if the VAT invoice had been raised then a credit would need to be raised in the next VAT quarter accordingly and the OP's client would need to discuss cashflow problems with HMRC.  Do not underpay without speaking to them first.

Thanks (1)
avatar
By dwnorfolk
22nd Oct 2014 08:08

Spoke directly with HMRC who insisted on the VAT being declared.  They say an advanced payment was received on the last day of the VAT quarter therefore the tax point becomes the date the funds enter the bank account.  The fact no supply was made thereafter makes no difference - VAT must be declared.  The VAT can be recovered in the next VAT quarter when the refund was made. 

 

Thanks (0)
avatar
By PracticePartner
22nd Oct 2014 09:04

That's your answer then

By asking HMRC directly you will naturally feel obliged to follow their guidance, so perhaps suggesting the client asks for time to pay (before the return is filed) is the next step.

I guess the lesson here is if you are on cash accounting beware of the downside of proformas and deposits and have something in your T&Cs to the effect that an amount equivalent to the VAT element of the total may be withheld for up to 3 months. That might not go down well with customers though.

I wonder how the customer dealt with this? If they were on cash accounting the reverse would apply to them. If your client incorrectly issued a VAT invoice instead of a proforma they could recover the input VAT on that if they are on accrual accounting (but their VAT cycle might mean both the payment and refund are in the same VAT quarter so they don't enjoy a 3 month interest free loan).

Thanks (1)
Replying to The Dullard:
avatar
By dwnorfolk
22nd Oct 2014 09:23

Had I omitted the amount, HMRC insist it would have been a deliberate error and thus a fine of up to 70% would have to be set. 

Your right regarding your second point, the customers wouldn't be happy with it.  It is an unfortunate situation because apparently the customer was not supposed to make the payment. A proforma was issued detailing the goods and the amounts and their accounts department just paid it without question.  Added to the fact it was made on the very last day of the VAT quarter. Sadly, no leniency from HMRC.

 

Thanks (0)
avatar
By PracticePartner
22nd Oct 2014 13:31

In the old days of cheques

They could have written a cheque dated the last day of the VAT quarter paying them back the money and when it got lost in the post made a payment by bank transfer. Can't do that after the event of course.

Thanks (0)