VAT Query

JasonLVC

James,_Oxford wrote: »

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 - Not correct, the supply for VAT purposes will have taken place either upon completion of the service (basic tax point) or if cash is recevied or if an invoice is raised within 14 days of the completion of the service (actual tax point).

There is only one supply. Indeed there is but only one invoice for £57.50 has been issued by the garage. Invoice will look like this :-


Service performed on x date = £600
Discount for prompt payment = £550
Total discounted price = £ 50
VAT @ 15% on disc. price = £ 7.50
Total to pay = £ 57.50

The payment made after 29 days is for that supply.

The consideration for the supply is £600 - No it is not, the consideration (ie, tech speak for payment) required by the garage for this supply is for £57.50 which I'll happily pay to them. They have not raised an invoice for £600+VAT, they have raised an invoice for £50 + VAT 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). The VAT element on the invoice raised IS for £7.50 but if the garage wants the other £550 it'll have to raise an invoice for it. You do realise that an invoice or daybook entry are the means by which a business can record its income and invoice asking for £50.00+VAT is not the same as an invoice asking for £600+VAT.

You can keep quoting the guidance but it cannot change the fact that if I get an invoice for £57.50 then why should I pay £600 to the garage?. What if the customer DOES take up the prompt payment offer?.

There's nothing wrong with your logic but the garage WILL lose out on this transaction

Taking your theory then, you are suggesting I can go into a Ferrari dealership tomorrow and buy a new one for £150,000 + VAT of £22,500 but arrange for the dealer to give me an invoice with a "discount" of £140,000 so I only pay £10,000 + £1,500 VAT thus saving myself £21k of VAT and then I promise to bung him an envelope for the other £140k later on, ask no questions? What if I don't pay him his £140k, what's he going to do about it as he 'sold' me it legally for £10k and I've got the invoice to prove it?.

On that bombshell, I'll be meeting all my fellow MSE'rs down the local Porsche and Lambo dealerships tomorrow to snap up a bargain.

JasonLVC

James,_Oxford wrote: »

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.

My preferred sources are CCH, Lexis Nexis, Tolleys (orange) and De Voill's.

coldstar

I think any VAT inspector seeing an invoice like the one described would probably decide it was done in this way "solely for the purposes of tax avoidance" and life would then become very interesting for the supplier!

patanne

If you use a garage/mechanic that doesn't need to be registered for VAT you will only save the VAT that could be charged on the labour element of your bill as they cannot reclaim the VAT on any parts they buy so you will still be charged for that

James,_Oxford

Jason

I think we just have different views of the rules.

For the record though I always base my views on the legislation. I was only referring you to publications because I have already referred to legislation and Customs guidance.

The book I referred to is actually written by Chris Jones. He is the top man at Lexis Nexis - we're not talking Mickey Mouse!

If anyone is reading this, don't take my word for it, speak to a good tax adviser.

RayWolfe

James, there is tax avoidance and tax evasion.
On which side do you think your cunning plan falls?

James,_Oxford

Evasion is illegal. I would never advocate that.

Avoidance is legal. But that term has been given a lot of bad press particularly from this government.

This idea is, in my view, just a straightforward application of the law. So I don't believe it falls under the banner of 'a scheme'.

The idea is actually in the Customs guidance. I don't know of any schemes which are actually in Customs guidance.

JasonLVC

James, you appear to have some knowledge of VAT and indeed VAT is a fairly subjective matter, but as a forum, you have to realise that the folks who read here will take our words as gospel and then go and do something stupid so we have to keep it simple and legal.

If you are qualified in anyway, then you'll likely be a member of the ICAEW and therefore aware of their code of conduct towards advising clients, equally you'll be aware from a risk/PI perspective that telling a client to 'exploit' a VAT area could lead to a negligence claim against you/practice which is why we've got to be straight down the line on these matters when posting on the forums. That of course, is just my personal opinion, but I'd hate for the OP to go away and then the garage is stuffed with a huge VAT bill.

The new penalty regime plus the disclosure rules for tax planning schemes now means that the taxpayer has to show reasonable care in what they do or be penalised. If they knowingly issued false invoices knowing full well they were going to get the full amount of cash, then what else could HMRC conclude?.

I'm very familar with pushing the boundaries of VAT legislation, I've been doing that for near on 10 years and have won at Tribunal on matters varying between hot/cold food, grants to not-for-profit organisations and partial exemption special method override disputes across all the sectors as well as duty disputes.

Equally, I've lost on some quite major cases too - so I'm not perfect by any means;)

But telling a potential OP to exploit the law is pushing it a bit too far without suitable context or warning. As I posted earlier, lets all go and by Ferrari's for 10p.

Such 'just doing what the law says' can lead to prison sentences including those behind the original steam/CHP schemes back in the early 90's, the 'clever' ones who operate MTIC fraud (carousal schemes) exploiting the reverse charge mechanism and more recently a number of British Para-Olympic team members who felt glueing a door knob onto the steering wheels of high performance cars was 'within the law' and allowed them to be bought VAT free. Strange how the team, the mobile fraudsters et al are now all doing time in prison for what is 'technically' legal.

As an idea, it is an interesting one, I just cannot see how it has got any legs as arguably, the supplier would have to have an arrangement for the customer to make the full payment despite getting a low value invoice....if that is not collusion or intent then it'll take some big balls for a supplier to go down this route for all their sales and then plead to HMRC that this is standard practice (pre-agreeing a sales values with the customer contrary to the contract agreement).

James,_Oxford

Jason

I think you are getting a bit carried away with yourself.

Scottish Power have produced a booklet for their customers which explains how their bills work. In the booklet is a section about discounts for prompt payment. Helpfully they have also produced a mock invoice which shows how the VAT on the prompt payment works. What you will see is that when a customer pays their bill promptly VAT is only charged on amount after applying the discount.


I am not able to post a link to the booklet but you can find it by going to the scottishpower.co.uk website and then clicking on 'Home Energy' (towards the top of the page) and then clicking on 'Customer Services' (on the list at the left hand side of the screen) and then clicking on 'Your Bill Explained' (which I think is the fourth option).

The discount on Scottish Power bills is obviously less than the example we were discussing but nevertheless the application of the tax rules which I am putting forward is being followed by Scottish Power.

Are Scottish Power wrong as well?

RayWolfe

James,_Oxford wrote: »

What you will see is that when a customer pays their bill promptly VAT is only charged on amount after applying the discount.

And where on that example does it say that "Actually you have to pay the pre-discount price and thus save yourself the VAT. Don't forget to send the balance in cash!"
Your arguments are naive in the extreme.