VAT on Deposits, Instalments and Credit Sales

Introduction

When customers pay for your goods or services through deposits, instalments, or credit, you need to know when the VAT becomes due and how to report it correctly. The timing of when you account for VAT depends on the type of payment arrangement you use — and getting this right ensures you declare VAT in the correct VAT Return period.

Tax Points: When VAT Becomes Due

A tax point is the date you must account for VAT on a sale. This determines which VAT Return period the transaction belongs to. Different payment methods create tax points at different times, so understanding these rules is essential for accurate VAT accounting.

Advance Payments and Deposits

When a customer pays a deposit or advance payment (a proportion of the total price paid before you supply the goods or services), the tax point occurs on whichever date comes first:

• The date you issue a VAT invoice for the deposit
• The date you receive the deposit payment

You must include the VAT on this deposit in your VAT Return for the period when this tax point occurs.

If the customer pays the remaining balance before you deliver the goods or perform the services, a new tax point is created. Again, this is whichever comes first: the date you issue a VAT invoice for the balance, or the date you receive payment. The VAT on the balance goes in the return for when this second tax point occurs.

Returnable Deposits

If you ask customers to pay a deposit when hiring goods from you, you do not need to account for VAT on that deposit if it is either:

• Refunded in full when the customer returns the goods safely
• Kept by you to compensate for loss or damage

These are security deposits rather than payments for a supply.

Forfeit Deposits

If you take a deposit for goods or services you will supply in the future, you must declare VAT on the deposit when you receive it or issue a VAT invoice, whichever happens first.

If the customer later decides not to proceed and you keep the deposit, VAT remains due on the money you received. You cannot reclaim this VAT even though you never supplied the goods or services.

Cash Accounting Scheme Users

If you use the cash accounting scheme, you account for VAT when you receive payment from customers — unless it is a returnable deposit.

Payments for Continuous Supplies

If you supply services (or goods like water, gas, or electricity) on a continuous basis and receive regular or occasional payments, a tax point is created each time you issue a VAT invoice or receive payment, whichever happens first.

For regular payments, you can issue a single VAT invoice at the beginning of any period up to one year, covering all payments due in that period (as long as more than one payment is due). This invoice must show for each payment:

• The amount excluding VAT
• The date the payment is due
• The VAT rate
• The amount of VAT payable

When you issue an invoice at the start of a period this way, you only need to account for VAT on each payment when either the payment is due or you receive it, whichever happens first.

If the VAT rate changes during a period covered by an invoice for continuous supplies, you can apply the new rate to the part of the supply made after the rate change — even if the normal tax point happened earlier (such as when payment was received in advance).

Credit and Conditional Sales

A credit sale means goods become the customer's property immediately, but they pay you in instalments.

A conditional sale means the goods remain your property until fully paid for.

For both types of sale, the tax point is created when you supply the goods or services to your customer. This is called the basic tax point, and you must account for VAT on the full value of the goods at this time.

This basic tax point can be overridden if you:

• Issue a VAT invoice or receive payment before supplying the goods or services
• Issue a VAT invoice up to 14 days after the basic tax point

Important: If you use the cash accounting scheme, credit sales and conditional sales are excluded from the scheme. You must account for VAT at the tax point, not when you receive payment.

When You Provide the Finance Yourself

If you sell goods on credit without involving a finance company, any credit charges you make are exempt from VAT — but only if you show them separately on the invoice. Related fees like administration, documentation, or acceptance fees are also exempt.

You must declare VAT on the full value of the goods in your VAT Return for the period when the tax point occurs.

Fees for transferring ownership of goods to the customer are only exempt if they are £10 or less.

If you offer interest-free credit (allowing the customer to pay over time without charging interest), you declare VAT on the full selling price when you supply the goods or services.

When a Finance Company Is Involved

The VAT treatment depends on whether the finance company becomes the owner of the goods.

Hire purchase agreements: The finance company becomes the owner of the goods. You are supplying the goods to the finance company, not the customer. You account for VAT on the value of the goods when you supply them to the finance company. Any commission you receive from the finance company for introducing the customer may be subject to VAT.

Loan agreements: The finance company does not become the owner. You are supplying goods directly to your customer, even though the finance company may pay you directly. VAT is due on the full selling price to your customer, even if you receive a lower amount from the finance company. The credit arrangement between your customer and the finance company is a separate transaction.

Reclaiming VAT on Payments to Suppliers

To reclaim VAT on payments you make to your suppliers, you need a valid VAT invoice or receipt. If a supplier issues an invoice covering several payments or showing monthly charges, keep this documentation to support your VAT reclaim.

Sources

• VAT: instalments, deposits, credit sales

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.