AAT – Tax Points

A little-known fact about me (Nick Craggs, AAT Distance Learning Director) is that I used to be a farmer.  In fact, I have a degree in it, but a career tilling the soil and feeding calves didn’t work out, and the next thing you know, you are wearing a suit, on an ACA training contract, and find yourself on a stock count on New Year’s Eve.

tax points

AAT – Tax Points

A little-known fact about me (Nick Craggs, AAT Distance Learning Director) is that I used to be a farmer.  In fact, I have a degree in it, but a career tilling the soil and feeding calves didn’t work out, and the next thing you know, you are wearing a suit, on an ACA training contract, and find yourself on a stock count on New Year’s Eve.

Anyway, my first job was as a bookkeeper for farmers, I knew a bit about farming, and not too much about bookkeeping initially.  One of the earlier tests of my career was from a farmer in Northumberland.  He had bought some fertiliser, and as all readers of PQ magazine know, fertiliser isn’t cheap.  Therefore, there was a lot of VAT on it, and the farmer wanted to claim it back, as you can imagine.  However, the problem was the invoice was dated 3rd March 2002, but I was preparing the February 2002 VAT return.  So as an accountant, I stood up for my fundamental principle of integrity, and told him, he would need to wait for the next VAT return before he could claim it back.

Sounds simple, just use stick by the date on the invoice, right?

Well as with most things to do with VAT, it isn’t so simple, as the date on the invoice, isn’t always the tax point.  The tax point is the date which dictates when we can claim back, or have to pay over the VAT.

Tax point

If the fertiliser was delivered to the farm on 3rd February 2002, this would be the tax point; as the delivery is before the invoice date.  This is known as the basic tax point.  As ever, it isn’t as straight forward as that, as if the invoice is dated within 14 days of the basic tax point, this would override the basic tax point, and the invoice date would be used.  So if the fertiliser was delivered on 25th February 2002, the farmer still couldn’t have his VAT, as the tax point would still be 3rd March 2002 as it is within 14 days of delivery.

The farmer could have gotten around the invoice being dated after his VAT quarter, by actually paying for the fertiliser up front.  If cash is paid before delivery or the invoice date, the date of the payment will always be the tax point.  However, many of the tight farmers I know wouldn’t do this, as they would rather claim the VAT back, and then pay the invoice later, much later!

So we have a tax point which could be the delivery date, could be the invoice date, or it could be the date that the goods were paid for, but wait! It gets more complicated!

What happens if the farmer pays a deposit on his nice shiny tractor up front?  Well, in this case, there would be two tax points.  There will be the date of the payment of the deposit, then the next tax point will be dependent on the delivery date, invoice date, or the payment of the balance.

Let us look at an example

Giles is going to buy a brand new tractor for £72,000.  He has agreed to pay a deposit of £12,000 on 4th June.  This is a tax point as he paid cash over, so the VAT on this will be £12,000 /120% x 20% (or you can just use the VAT fraction of 1/6th), which is £2,000.

He then takes delivery of his new tractor on the 25th of June.  He then receives the invoice for the balance, which is £60,000, on 3rd July.  He then begrudgingly pays the invoice in November, because that is what farmers do.

His VAT return quarter ends in June, and obviously, he wants to claim back £12,000 of VAT from HMRC as soon as possible.  Within his VAT return quarter, he has made a payment of £12,000 and taken delivery of his new tractor, which is the basic tax point.

However, Giles’s problem is that his machinery dealer has issued an invoice within 14 days of the basic tax point, so the basic tax point is overridden and the actual tax point is 3rd July, outside of his VAT return, so he can only claim £2,000 of VAT this quarter.  The rest of the VAT will have to wait until the next VAT return before he can claim it back.

Why don’t you have a go at this example and see how much VAT Alan can claim back on his June VAT return?

Alan has paid a deposit on his plough of £6,000 on 20th June.  The plough is then delivered on 23rd June and he pays the balance of £12,000 on 29th of June, and then he receives the invoice on 3rd July.

See me work out the answer below:

 

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