Q- My client is a planning consultant. He had a contract which began prior to his effective date of VAT registration and continued after. The agreement was for stage payments to be made. I understand that at least one invoice was issued prior to registration, but payment was not received until after he was registered. Does he have to account for VAT on that payment?
A- Where there is a supply of services in the course of construction where the contract is for stage payments, then Regulation 93 (VAT regulations 1995, SI 1995/2518) applies to determine the time of supply. VATTOS9110 https://www.gov.uk/hmrc-internal-manuals/vat-time-of-supply/vattos9110 confirms that this regulation governing the time of supply applies to professional services such as architects, surveyors, consultants as well as the more obvious construction services.
The time of supply is the earlier of issuing a VAT invoice or receiving a payment, and as a VAT invoice cannot be issued by a person who is not VAT registered, the time of supply will be the date that payment for that invoice is received. In your client’s case, payment was after the effective date of registration (EDR), and therefore VAT is due.
Once your client is registered, a VAT invoice will create a tax point, so if they prefer to account for output tax when they have been paid they can make use of pro-forma invoices or requests for payment which are clearly annotated that they are not VAT invoices. This would allow the payment to create the tax point and they would then need to issue a proper VAT invoice to the customer.
The effect of Regulation 93 is the same as that of Regulation 90 (continuous supplies of services), and although there is a distinction between a continuous open-ended supply, and a single supply over a prolonged period but where there will be a point at which the contracted work is finished, similar issues arise on registration.
It is useful to be aware of an old tribunal case (B J Rice) where HMRC subsequently accepted that, where there has been a continuous supply of services, but that service had wholly ceased prior to the EDR, no VAT is due even if the payments are received following registration.