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)
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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.
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.
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!
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.
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.
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.
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.
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).
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.