Nick Craggs explains everything you need to know about tax points, relevant to the level 3 Tax Processes for Business unit.
A little-known fact about me 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.
I also love a bit of tax. The problem with tax though is that it keeps changing, and so do the exams. AAT have just started to assess the 2024 Finance act, so I thought I would write this month about an aspect of tax that doesn’t change, which is tax points in the Tax Processes for Business unit.
Anyway, my first job was as a bookkeeper for famers. I knew a bit about farming, and not too much about bookkeeping. 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. So 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 3 March 2025, but I was preparing the February 2025 VAT return. 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 stick by the date on the invoice, right?
Well, as with most things to do with VAT, it isn’t so simple. 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.
If the fertiliser was delivered to the farm on 3 February 2025, 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. 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 25 February 2025, the farmer still couldn’t have his VAT, as the tax point would still be 3 March 2025 as it is within 14 days of delivery.
The farmer could have got 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!
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? 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 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 4 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 25 June. He then receives the invoice for the balance, which is £60,000, on 3 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 3 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.
- Nick Craggs, AAT distance learning director, First Intuition
