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Tribunal: VAT is due on overpayments

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22nd Jun 2017
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A common question is whether output tax is due on overpayments made by customers, where the supplier keeps the money. Neil Warren considers this issue in the light of an Upper Tribunal win by HMRC, concerning overpaid carparking fees.

Parking the car

Imagine the following scene: you are in a hurry to get to the supermarket to do your weekly shopping, and need to pay £1.40 for an hour’s car parking. You check your purse or wallet and only have single £1 and 50p coins for the parking machine. The machine does not give change and clearly states that overpayments are accepted. Is the value of your fee for VAT purposes the £1.40 payable or the £1.50 you actually pay?

The above question was considered by the Upper Tribunal in the case of National Car Parks Ltd ([2017]UKUT 0247), and the tribunal reached the same decision as the First-tier Tribunal that output tax was due on the higher amount:

“Under the contract between NCP and the customer which is formed when the customer inserts money into the ticket machine at the car park and receives a ticket, NCP grants the customer the right to park his or her car for one hour in return for inserting not less than £1.40. If the customer wishes to park for up to three hours then he or she must pay not less than £2.10. It follows that NCP agrees to grant a customer the right to park for up to one hour in return for paying an amount between £1.40 and £2.09. If a customer pays £1.50, that amount is the value given by the customer and received by the supplier in return for the right to park for up to one hour. Accordingly, that is the taxable amount for VAT purposes.”

Invoice paid twice

What is the position if an invoice is raised by a business for goods to the value of £100,000 plus VAT, the customer pays the invoice twice and the supplier retains the money? I encountered this situation about 20 years ago when I was doing some freelance audit work (before the days of money laundering) and the supplier justified keeping the money because the customer was always a slow payer. There was always an intention to repay the money if the customer identified his error.

In this situation, output tax is only due on £100,000 because this is the value of the goods supplied to the customer, rather than on the net amount paid of £200,000. This is a different outcome to the car parking situation where the parker was required to pay not less than £1.40.

Bookkeeping entry

As a supplementary question to my example above; what would be the double entry bookkeeping entry to reflect the £120,000 overpayment by the customer?

Answer: Debit – ‘bank’ £120,000; Credit – ‘other creditors’ £120,000. As you can see, the entry is totally silent on the VAT control account.

Keeping overpayments

I recently dealt with a query from an accountant where the client wanted to add the following paragraph to his terms and conditions with customers about overpayments:

“If you have a credit balance for a period of six years and have not requested a refund, we will treat it as a donation or gift, and write off the balance. No VAT will be charged in such cases as no VATable supply is made.”

There is no problem with this sentence; the value of the supply for VAT purposes is based on the invoiced value of goods and services received, and it is not linked to payments made by the customer. The main situation when payments become relevant is in the case of non-payment, when bad debt might be an issue, and the customer must adjust his input tax on purchase invoices more than six months overdue for payment.

Conclusion

For HMRC’s policy on overpayments, see the VAT Supply and Consideration manual para: VATSC63600. This clearly refers to overpayments “due to a mistake by the customer.” I suppose this is the key difference with the car parking case where the customer knew he had to pay “at least £1.40” to park his car for an hour – there was no mistake involved.

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Replies (3)

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By robby10
26th Jun 2017 11:07

Interesting article, thank you.
With regards to your second example where there is a clear duplicated payment, the vat position is clear, but what are your thoughts around POCA/MLR: would you not suggest that the supplier notify the customer of their error?

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By ShayaG
26th Jun 2017 15:27

Interesting contrast between car parking managers being made to pay tax on gratuities and restaurants being allowed not to pay tax on tips and percentage service charge which is consistently applied in 95% + of covers.

The only reason I can think this is is because everyone hates car parking companies.

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Replying to ShayaG:
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By Karen Watson
26th Jun 2017 19:17

Not a "gratuity" - the user isn't giving it out of gratitude for good service, or even sympathy with the hard-pressed staff.
What they think of the parking co is of no relevance when the "service charge" is not optional.

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