Tax and VAT
Tax point
A tax point, also known as the time of supply, is the specific date a transaction takes place for value-added tax purposes, determining which tax return period the transaction falls into.
What is Tax point?
The tax point, frequently called the time of supply, is the exact date a transaction becomes liable for value-added tax. You need to establish this date to know precisely when to report the sale or purchase to your local tax authority. It dictates which tax return period a transaction belongs to. If you issue an invoice or receive payment before delivering goods or completing a service, the tax point usually shifts to that earlier date. This rule prevents businesses from delaying their tax payments. Getting the time of supply right ensures you declare your output tax and claim your input tax in the correct filing period. Incorrectly identifying this date often leads to penalties, late payment interest, or compliance audits by the tax administration.
How Tax point works
To determine the correct tax point, you must look at the sequence of events in a transaction. The basic tax point usually occurs on the date you deliver goods to a customer or complete a service. However, tax authorities typically apply an actual tax point that overrides this basic date if certain events happen first. If you issue a tax invoice or receive full or partial payment before the basic tax point, the date of that invoice or payment becomes the actual tax point. Conversely, if you issue a tax invoice shortly after delivering the goods, the invoice date might become the new tax point depending on local regulations. You must monitor these triggers to record the transaction in the correct accounting period.
- Identify the basic tax point when goods are delivered or services are completed.
- Check if you received an advance payment before the delivery date.
- Note the exact date you issue a formal tax invoice to the buyer.
- Compare the dates of delivery, payment, and invoicing to find the earliest event.
- Record the transaction in the tax return period covering this earliest date.
Worked example
Gulf Trading LLC signs a contract to supply office furniture for 10,000 plus a 10 percent local tax rate, totalling 11,000. The customer pays a 50 percent deposit of 5,500 on the 15th of March. Gulf Trading delivers the furniture on the 4th of April and issues the final invoice on the 6th of April.
Because the deposit was received in March, a tax point is created on March 15th for the 5,500 advance. The company must report the 500 tax portion in their March tax period. The remaining 5,500 balance triggers a second tax point on April 4th upon delivery, requiring the final 500 tax to be reported in April.
Why it matters for your business
Understanding the tax point is critical for cash flow management and legal compliance. If you declare a transaction in the wrong return period, you risk facing financial penalties and interest charges from the tax authority. Recognising the time of supply early helps you set aside the exact amount of output tax you owe before the filing deadline approaches. It also ensures you claim input tax on your business purchases at the earliest legal opportunity. Paper & Pen creates invoices, quotations and receipts, helping you accurately date your documents to establish the correct time of supply.
Questions
Common questions
What happens if I issue an invoice before delivering goods?
Does an advance payment create a tax point?
How does the time of supply affect my VAT return?
Related terms
- Value added tax Value added tax is an indirect consumption tax assessed on the incremental value created at each stage of the supply chain, from initial production to the final sale.
- VAT return A VAT return is an official tax document submitted to a government authority that summarises a business's total sales, purchases, and the resulting value-added tax payable or refundable for a specific period.
- Tax invoice A tax invoice is a legal document issued by a registered business to a buyer, detailing the goods or services provided and the specific amount of tax collected on that sale.
- Output VAT Output VAT is the value-added tax that a registered business calculates and charges to its customers on the sale of taxable goods and services.
- Place of supply The place of supply is a tax principle that determines the jurisdiction where a transaction occurs, which dictates which country's tax authority has the right to collect value-added tax.
- Corporate income tax Corporate income tax is a direct levy imposed by a government on the net profits or taxable income earned by a registered company during a specific financial period.