Our thanks to the specialist VAT team at Croner for this sound advice about dealing with the purchase of goods under lease purchase, hire purchase, conditional sale or credit sale agreements when you operate under the cash accounting VAT scheme.

The client is a supplier of recycled and recyclable packaging and uses the cash accounting scheme as his customers are large and tend to dictate their own payment terms. Thinking about the future of packaging, he is about to buy an adjacent plot of land costing £300,000 + VAT to enable the business to expand in the future. The seller agreed to collect payments in three instalments over the next two years but when he agreed on those terms, he didn’t realise that he will need to account for output tax on the full selling price on the return covering the date of the actual sale. Can my client do anything so that this works on both sides? He doesn’t have the available funds to pay the VAT up-front as well as the first instalment, but doesn’t want the seller to change his mind.

This client is on cash accounting, which, as a rule, only allows input tax to be recovered when goods or services are paid for.  Obviously, your client could leave the scheme and switch to invoice accounting but this would not be ideal for his business generally and he wishes to remain on the scheme for as long as he is eligible.  However, there are some provisions within the cash accounting regulations that have the effect of excluding some transactions from the scheme, either to assist the cash flow of smaller businesses or for anti-avoidance purposes.  Notice 731 sets out these transactions in Paragraph 2.7, which has the force of law:

Purchases of goods under lease purchase, hire purchase, conditional sale or credit sale agreements are excluded from cash accounting, which means that even though a purchaser may be using cash accounting, he can recover the VAT up-front at the date of the purchase invoice or HP agreement.

Additionally, where a VAT invoice is issued on the supply of goods and payment is not due in full within six months, then HMRC guidance manual VCAS2200 confirms that this is also excluded from the scheme, as follows:

“Supplies where payment is not due for more than 6 months after issue of the invoice

The Regulation refers to supplies where payment is not due. Cash accounters who issue or receive such invoices must account for output tax and input tax on them using the normal accounting rules. They must not delay accounting until payment is made or received.”

The manual goes further than Notice 731, which does not mention the transaction from the purchase side at all; only referring to ‘supplies where you issue a VAT invoice….’ However, the wording in the manual makes it clear that HMRC’s policy is to apply the provision to both parties to the supply.

Therefore, as your client will be able to claim the input tax at the outset he should be able to pay it over to the seller, making the extended payment term a feasible option.  If they are able to time the sale so that the input tax is recoverable on your client’s return before it is due on the seller’s return, so much the better!

If their respective VAT staggers are not conducive to this, there is a provision whereby HMRC have the power to assign a credit owed to one taxpayer to another entity.  Your client would need to make a clear request to HMRC in writing, asking them to assign the VAT credit to the seller.  Detailed guidance on this procedure is not in the public domain but if HMRC agrees, it means that rather than receiving a repayment and then paying it over, HMRC would simply transfer it from the buyer’s VAT account to the seller’s to settle his output tax liability.


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