Date of supply is a very important concept to be well versed with to ensure full compliance with the VAT guidelines in place.
Date of supply is the date or point where VAT becomes chargeable, the tax period within which this date falls requires the tax to be reflected in the tax return and paid as part of the tax liability within 28 days of the end of the tax period. Hence, having clarity on the concept of Date of Supply will help you avoid having to pay the VAT from your funds, instead of from customer receipts.
Date of supply for goods:
- When goods are transferred to the buyer
- When ownership in the goods is transferred to the buyer
- When possession is transferred to the buyer
- When payment is received for the supply
- When Tax Invoice is issued for the supply
Whichever event from any of the above 5 occurring FIRST will be considered as the date of supply. Also to be noted, in case, of any of the 1st 4 events occurring first, the Tax Invoice is required to be issued within 14 days of the date of occurrence of the event.
Date of Supply for Services:
- Completion of the service
- Receipt of Payment
- Issuance of Tax Invoice
Whichever event from any of the above 3 occurring FIRST will be considered as the date of supply. Also to be noted, in case, of any of the 1st 2 events occurring first, the Tax Invoice is required to be issued within 14 days of the date of occurrence of the event.
The above guidelines are pretty straight forward, however, in actual business dealings, businesses tend to misinterpret them and get into a scenario where the tax liability is crystallized and payment to be done from business funds instead of customer receipts. For e.g. brokerage services. The service is complete when the terms of sale have been completed by the buyer with the seller. This requires several actions to be undertaken by both and also government bodies to transfer the ownership. This could take anywhere between a week to months. In such a scenario, if the brokerage firm raises a Tax Invoice, when the deal is agreed to, instead of when the deal is completed and commission receivable, then the firm will be liable for the VAT if a tax period ends and tax is payable between the deal agreement date and the deal completion date.
The solution for this is to provide the customers with a Proforma Invoice or Indicative Invoice at the deal agreement stage and issue the Tax Invoice when the service is completed i.e. deal completed and payment receivable.
This applies to all businesses, be it contracting, marketing or any business, where there is a time gap between deal agreement and deal completion.