Installment Payments, Hire Purchase, Deposits and Credit Sales

VAT and Installments

How to charge or reclaim VAT for payments in advance, installments, on deposits, or on credit schemes?

Your business might offer customers the option to pay for goods and services in different ways. These include:

• paying in installments
• credit sales, both with and without the involvement of a finance company
• making advance payments
• Deposits and VAT

Advance Payments and Deposits

An advance payment, or deposit, refers to a proportionate payment of the total selling price that a customer pays before you supply the goods or services to that customer.

If you ask for an advance payment, the time of supply is whichever of the following happens first:

• the date you issue a VAT invoice for the advance payment
• the date you receive the advance payment

You include the VAT on the advance payment on the VAT Return for the period when the VAT invoice is issued or the advance payment is received.

If the customer pays you the remaining balance before the goods are delivered or the services are performed, another time of supply is created when whichever of the following happens first:

• you issue a VAT invoice for the balance
• you receive payment of the balance

So you include the VAT on the balance on the VAT return for the period when the invoice for the balance or payment of the balance is received.

Credit Sales and VAT

A 'credit sale' means the sale of goods which immediately become the property of your customer but where the price is paid to you in installments.

The basic time of supply for a credit sale is created at the time you supply the goods or services to your customer, which is when you should account for the VAT on the full value of the goods.

Hire Purchase

Hire purchase agreement means a transaction which takes the form of a lease and intended to transfer ownership of goods at the end of a specified term under which the periodic payments are credited against the purchase price, but the ownership of the goods remains with the seller, or financial institution acting as seller, until the purchase price is paid.

However, VAT is payable on the total consideration when the agreement commences. In others words, the total VAT is paid up front.