VAT - delaying payment of VAT

The recent increase in VAT rate to 20% has focused attention on cash flow and ways to delay payment of output VAT on fees. One possible way is to issue a ‘request for payment’ rather than a VAT invoice.

How does this work?

A request for payment, which is not a VAT invoice, does not create a tax point (i.e. the point at which the supply of services is treated as taking place or the date when payment is made). The document should look as little like a VAT invoice as possible, e.g. by omitting the supplier’s VAT registration number and showing a VAT-inclusive sum with no separate amount of VAT. It should also be clearly marked ‘this is not a VAT invoice’.

When is it necessary to issue a VAT invoice?

Normally, within 14 days of the basic tax point. With approval from HMRC, it may be possible to extend this. Solicitors, for example, may extend to three months if the consideration for the supply is not ascertained or ascertainable at or before the basic tax point. This can apply when using the services of an outside cost draftsman.

Having issued a request for payment, a VAT invoice must follow within 30 days of establishing a tax point, e.g. within 30 days of receipt of payment. Failure to do so can result in a penalty.

What if an interim invoice is issued?

If an interim invoice is issued before completion of the work, it creates a tax point only if it is a VAT invoice. If a request for payment is issued, the tax point arises when the interim payment is received.

How practical is this?

Issuing a request for payment followed by a VAT invoice adds an extra layer of administration to your business. You will need to be aware of the creation of a tax point and ensure a VAT invoice is issued within 30 days. For businesses with long term contracts (e.g. architects) it may be more practical than for those with generally shorter term assignments such as solicitors.