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Continuous supply of services – How the VAT rules may help your cashflow

The VAT Regulations contain special time of supply rules for what is normally referred to as a “continuous supply of services”.

Generally, a charge to VAT arises at the earlier of:-

  • the time of supply of goods or services, and
  • the date an invoice is raised.

However, where there is a continuous supply of services, the tax point becomes the earlier of:

  • the date an invoice is raised, and
  • the date of receipt of a payment.

In practice, businesses operating under these rules normally issue a “request for payment” rather than a formal invoice. Only when payment is received will they issue a receipted invoice bearing a VAT number. Thus, their payment of VAT on the qualifying services will be triggered by the date they receive payment, rather than the date of supply or the issue of an invoice. In effect, the business does not have to pay VAT on its debtors.

The beneficial cashflow result of this is obvious, in terms of deferral of VAT liability until the cash comes in. There is also an argument to say that some customers or clients may defer payment of other creditors (from whom they have already received a VAT invoice on which they can claim credit for input tax), and make payment earlier to those operating the continuous supply of services scheme, so they can secure a VAT invoice on that supply as well.

Businesses eligible to operate the scheme on their qualifying services will be those which have ongoing working arrangements with clients, involving no specific project or end-date. This may include, for example:

  • some professional services
  • consultancy, where the role is continuous
  • regular or periodic maintenance work
  • management services
  • agency services
  • hire, lease or rental of equipment

It is important to note, it is each contract which may qualify as a continuous supply of services, not the business as a whole. That said, of course, it may be that some businesses only offer services which are continuous in nature. In that case, all their supplies will fall within the scheme.

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