VAT Query

JasonLVC

James,_Oxford wrote: »

I don't want to douse your bonfire mum of 3 but perhaps I could refer you to the Value Added Tax Act 1994, Schedule 6 paragraph 4.

Sorry James, but your scenario is never going to work and quoting a piece of legislation without full context is meaningless. Mum of 3 is quite correct in her assertions.

Schd 6 does indeed allow a taxpayer to offer a discount and the VAT is calculated on the discounted value of the supply and indeed whether or not the customer takes up that discount, the VAT doesn't change.

Scenario:-

So far then job cost £600 + VAT of £90.00 = £690 in total.
Supplier offers a discount of £550 for prompt payment so issues a proper VAT invoice for £50 + £7.50 VAT = £57.50

As the customer then, I am now only legally obliged to pay £57.50 to the garage as they have given me a huge discount if I pay early. You state the garage is no worse off, but it is worse off by £550 quid as I ain't paying any more than £57.50 to them.

The only way the garage can now get the full £600 from me is if it issues another VAT invoice for the £550 + VAT or I pay cash and they keep it off the books (known as suppression and is considered to be fraud). They cannot just have £550 turn up into their bank account/books and not apply VAT to it - it doesn't work that way.

Even if we accept your concept, the consideration will be the money received into the business. During a VAT inspection, HMRC will notice that the garage received £600 for a job but only declared £7.50 output tax - and they'll want the difference from the garage.

The Schd.6 discount is to reduce the admin for traders. Technically, they would have to issue an invoice at full price + VAT and then if paid in discount period, the trader would have to issue ANOTHER invoice and credit note the original to ensure the VAT is correct. Schd. 6 cuts this admin task out but as I said, your theory fails on the basis the garage has to account for VAT on ALL the income it receives and so it would have to issue a new invoice for the remaining amount the customer pays.

James, if it was THAT easy, then EVERY business would do it. The only business that would subscribe to this concept is at risk of being hit with a big VAT bill and deserves everything it gets.

To take an extract from HMRC's internal guidance :-

VAT is always calculated on the discounted amount when the discount offered is unconditional, as long as the discounted amount is paid.

(JLVC - so where the discoutned amount is NOT paid, all bets are off)

Where a discount depends on some future event this is a conditional discount and VAT is calculated on the full value of the supply. If at some future date the customer ‘earns’ the discount then a VAT credit note must be issued to reflect the discount. This involves amending the output side of the VAT account. Notice 700, para. 7.1 and 18.1 (2002 edn) is on discounts.

JasonLVC

James,_Oxford wrote: »

Pumpkinface - You're wrong. I'm not just making this up you know. Its in the legislation. You can get early payment discounts for VAT.

Deleted as irrelevant

James,_Oxford

Also, while I'm in the mood for sharing my tax tips, here's another:

If you have a VAT registered business and you buy a car for use in that business you'll know that it's very difficult to reclaim the VAT back on the purchase (unless you are a taxi driver or a driving instructor etc). This is because you have to prove that you use that vehicle exclusively for business purposes, and that's quite a tough test.

But what not a lot of people don't know is that the rules on recovering VAT for maintenance expenditure are a lot more generous. If you have a privately owned vehicle you can reclaim the VAT on maintenance costs even if you only occasionally use the vehicle for business purposes (providing of course the business pays for the work). It therefore can often make sense for the business to pay for the maintenance costs in order to recoup the VAT.

There may be a series of posts following this one which say that what I've said is rubbish. So, don't just take my word for it, have a word in the shell-like of your local accountant.

JasonLVC

James,_Oxford wrote: »

There may be a series of posts following this one which say that what I've said is rubbish. So, don't just take my word for it, have a word in the shell-like of your local accountant.

It's not a rubbish tip, but I think it is a fairly well known one by most switched on traders and of course it means the business has to pay for the repair of a private individuals vehicle. Such actions would prejudice profitability if a lot of people did this. Are you thinking on the basis of a sole trader or small Ltd Co.?

Not forgetting that the right to deduct input tax is based on the expenditure being for a business purpose and so if this was say, the wife's car put through expenses and HMRC could evidence that, then they'd rightly block the input tax reclaim - although highly unlikely you'd get a HMRC officer that smart/pedantic.

Same goes for those smart alecs who bought plasma TV's for their conference room and during an inspection HMRC notice it's not there....Hmm, wonder if it is in someone's house?.....let's block the input tax until they can prove it....

Might as well throw in that a lease car allows 50% of the VAT on the rental cost to be reclaimed as well just for good measure.

But then such costs as described may be seen as BIK for the person making those claims, depending upon a number of factors so you save the VAT but then get stung for tax personally.

JasonLVC

Oh, James, Oxford, see you are new here so "Hello", welcome aboard the goodship MSE.:beer:

James,_Oxford

Jason

The prompt payment discount is accepted by Customs. At para 7.3 in VAT Notice 700 it specifically states that

'if you offer a discount on the condition that the customer pays within a certain amount of time..then the tax value is based on the discounted amount even if the customer does not take up your offer'

It's there in black and white.

My suggestion is that the customer would not take up the offer and would pay later, but still benefit from paying VAT on the discounted amount (even though it was not taken up).

JasonLVC

James, you've clearly decided you are right based on your brief reading of the legislation and you may even have got away with it personally in the past but you cannot read one section of the law and not cross reference it against other aspects as you'll find law contradicts itself quite often and you have to take a more rounded view.

Your quote - 'if you offer a discount on the condition that the customer pays within a certain amount of time..then the tax value is based on the discounted amount even if the customer does not take up your offer' - no problem with that in isolation.

....My suggestion is that the customer would not take up the offer and would pay later - HOW exactly can the customer pay later without there being rise to a new VAT liability?. I'd say 'discuss', but the answer is either he gets another invoice from the garage (which the garage would HAVE to do or be breaking the law) or the garage breaks the law and does the transaction off the books.

Every penny that is income into the business has to be accounted for, for VAT purpsoes. There are TWO transactions here, the first is for the £57.50 and the second is for the remaining amount for the job. This second transaction requires a second invoice. Can I point you in the direction of HMRC guidelines on Tax Points (Basic and Actual) as a starting ground as to why your scenario doesn't work. A business cannot operate where one invoice is issued for £5.70 but they credit £600 against it in the accounts - the auditor would have a field day. In the same way you wouldn't raise an invoice for £600 and only declare £57.50 in the books.

I deleted my previous post above as I thought it irrelevant but I'll re-introduce what that post stated :-

How long have you been an indirect tax consultant and tax lawyer?.

I ask that question becuase if you are a fellow tax bod, then we can have a more technical discussion about and bring in case law. If you are not a tax bod, then I'll have to find other ways of explaining to you why you cannot abuse the discount legilsation the way you suggest.

slipp_digby

James, Oxford

full marks for effort, but you just got OWNED

James,_Oxford

HOW exactly can the customer pay later without there being rise to a new VAT liability


To answer your question:

The customer is given the invoice on completion of the work and has the option of taking up the discount by paying within 2 days or not getting the discount by paying after 2 days. The terms of business require payment of any invoice within say 30 days.

The customer decides not to pay within the 2 days and therefore not avail himself of the discount and actually pays (like most of us do) after 29 days. The supply has taken place when the invoice was issued. There is only one supply. The payment made after 29 days is for that supply. The consideration for the supply is £600 and the VAT element is £7.50 as this is 15% of the discounted amount of £50 (in accordance with the legislation and Customs VAT Notice).

James,_Oxford

Do a google search on 'Prompt payment discount VAT'.

The fifth hit on my screen is 'Principles of Business Taxation..'

Click on it. It opens up a google book which is in all good techie bookshops. Read the paragraph it presents (E8.5) and in particular Illustration 1.