VAT Tax Point Rules: Deposits and the 14-Day Rule

VAT tax point rules decide which VAT return a sale belongs in. The basic tax point is when you deliver goods or finish a service, but a deposit received or an invoice issued earlier moves it forward to that earlier date. For any business that takes deposits, it means some VAT is due a quarter before the work is done.

Key takeaways

• The tax point fixes the VAT period and the VAT rate for each sale.
• Payment or a VAT invoice before you supply creates an earlier, actual tax point.
• Deposits are normally taxed when received; returnable deposits are not.
• Invoicing within 14 days after supply usually moves the tax point to the invoice date.
• Cash accounting replaces most of this with the date you are paid.

What is a tax point?

A tax point (HMRC also calls it the time of supply) is the date on which a VAT-able sale is treated as taking place. GOV.UK's VAT guide (Notice 700) sets out two layers. The basic tax point is when goods are sent, collected or made available, or when a service is performed. An actual tax point overrides it if something happens first, or within a short window afterwards.

Which event sets the tax point?

The deposit rows come from GOV.UK's page on VAT on instalments, deposits and credit sales, which says VAT on an advance payment is due when it is received or when a VAT invoice is issued for it, whichever happens first. A further tax point then arises for the balance.

Worked example: a deposit that straddles two VAT quarters

Illustrative example, invented figures, not a real client. A joinery business is VAT-registered on the standard scheme with calendar quarters, so one return ends on 31 December and the next on 31 March. It agrees to build fitted wardrobes for £6,000 plus VAT at 20%, £7,200 in total.

• 18 December: the customer pays a £2,400 deposit. The VAT inside it is £2,400 ÷ 6 = £400. Tax point: 18 December, so £400 goes in the October to December return.
• 16 January: the wardrobes are finished and fitted. That is the basic tax point for the remaining £4,800.
• 23 January: the joiner issues a VAT invoice for the balance, within 14 days. The tax point for the balance becomes 23 January, and £800 of VAT goes in the January to March return.

Many small businesses treat the whole job as January income because that is when they finished and invoiced, and declare all £1,200 of VAT in the later return. That understates the December return by £400. HMRC can charge interest and, in some cases, a penalty for errors like this, so it is worth setting your software to post deposits on the date the money lands.

If the customer had cancelled in January and the joiner had kept the deposit, the £400 of VAT would still be due, because a forfeited deposit for a future supply stays within the charge.

Checklist for businesses that take deposits

1. Record every deposit on the date it is received, not on the date the job ends.
2. If you ask for payment in advance, use a pro forma marked "this is not a VAT invoice", so that it does not create a tax point by itself.
3. When you finish, issue the VAT invoice within 14 days so the invoice date sets the tax point for the balance. Our guide to VAT invoice requirements lists what it must show.
4. Show the deposit already paid on the final invoice, so VAT is not charged twice.
5. Separate returnable hire deposits from deposits against future work.
6. Check the quarter-end cut-off before each return. Our VAT return deadlines guide covers when each return is due.

When the cash accounting scheme changes the picture

Under the VAT cash accounting scheme, output VAT is accounted for when your customer pays you, and input VAT when you pay your suppliers. In the example above, the result would be the same, because the deposit and the balance were paid in different quarters. The difference shows when a customer pays late: on cash accounting you do not account for the VAT until the money arrives. See our cash accounting guide to decide whether it suits you.

Why the tax point also fixes the VAT rate

The tax point is not only about which return a sale goes in. If a VAT rate changes, or a product moves between the standard, reduced and zero rates, the rate you charge is the one in force at the tax point. A deposit taken before a change keeps the old rate for the amount paid, while the balance follows the rate at its own tax point. HMRC normally publishes specific guidance when a rate changes, so check GOV.UK at the time rather than assuming the usual rules apply in full.

Common mistakes

• Leaving deposits out until the job finishes. The deposit has its own tax point.
• Issuing a full VAT invoice upfront by habit. It can bring all the VAT forward, even if the customer has not paid.
• Missing the 14-day window. The tax point then falls back to the date of supply, which may sit in an earlier quarter.
• Charging VAT twice. The final invoice should net off the deposit already accounted for.
• Treating all deposits the same. Returnable deposits on hired goods are handled differently from payments towards future work.

How we can help

We prepare and file VAT returns with tax points checked line by line, including deposits and quarter-end cut-offs. VAT returns start from £120/quarter on a fixed fee. See our VAT returns service, view our pricing, or contact us before your next quarter ends.