What it means
In a VAT system, a business charges tax on its sales and passes it to the tax authority. To work out which return a sale belongs on, the business needs a single date that fixes when the supply happened.
That date is the tax point, and it can differ from the invoice date or the date the customer pays. Under a typical basic rule, the tax point for goods is when the goods are delivered or made available to the customer, and for services when the work is completed.
Rules then allow the date to move. For example, issuing an invoice or receiving payment before the basic date can pull the tax point earlier for that part of the supply.
The tax point matters for cash flow and compliance. If a business delivers goods on the last day of a quarter but invoices in the first week of the next, the tax may belong in the earlier quarter.
Getting it wrong can cause late payment, interest or penalties, and it can also affect the timing of the buyer's right to recover the tax. Deposits and part payments need care, because they can pull the date forward.
A deposit received before delivery can create a tax point for the amount received, so a business may owe tax on money it has not yet earned in an accounting sense. Continuous supplies, such as a monthly service contract, usually have a tax point each time a payment is due or received.
Some businesses use a cash accounting scheme, which lets them account for the tax when they receive or make payment instead. Schemes like this exist in several countries and are meant to help smaller businesses, though each has eligibility conditions.
Rules and rates differ by country and change over time, so finance teams should take their guidance from the local tax authority and their adviser. A good habit is to record the delivery date, invoice date and payment date for every sale, so the tax point can be proved later.
In practice
Real-world examples
Example 1
A furniture wholesaler delivers a large order on 29 June and invoices on 3 July. Its accountant treats 29 June as the tax point, so the tax is reported in the quarter that ended on 30 June.
Example 2
A software consultancy receives a $5,000 deposit from a new client in the last week of a tax period, before any work starts. The finance manager records a tax point for the deposit and reports the related tax in that period.
Example 3
A cafe supplier invoices a restaurant chain on the first day of each month for deliveries made throughout the previous month. The bookkeeper checks the rules for continuous supplies to decide whether the tax point is each delivery date or the invoice date.
Think of it
The tax point is like the finishing line in a race. Even if runners stretch out over time, the judges record the exact moment the winner crosses that specific line to decide official results.
Formula
Calculation
Tax due on a sale = Net sale amount x Tax rate
The tax is reported in the period that contains the tax point
Suppose a business sells goods with a net price of $10,000 and the sales tax rate is an illustrative 10%. Tax due = 10,000 x 0.10 = $1,000, so the customer is charged $11,000 in total. The goods are delivered on 28 March and the invoice is issued on 5 April. If the quarter ends on 31 March and the basic delivery rule applies, the tax point is 28 March, so the $1,000 belongs in the quarter ending 31 March even though the invoice was issued later.Case study
Seen in the real world
Halcyon Print Works is an illustrative, fictional printer that delivered a large job on the last working day of a quarter but sent the invoice nine days later. The office assistant included the sale in the following quarter's return because that was when the invoice was issued.
During a routine review, the external accountant noticed that the delivery date was the basic tax point and that the sale belonged in the earlier quarter. The tax involved was $4,800, and the late reporting meant the previous return had been understated.
Halcyon corrected the position, paid the tax with a small amount of interest, and changed its procedure so the delivery date is recorded on every job sheet. In this illustrative story, the cost of the mistake was small, but the process change prevented repeats.
Watch out
Common mistakes
- Assuming the invoice date is always the tax point, when delivery, completion or payment can come first.
- Ignoring deposits and advance payments, which can create a tax point before the work is done.
- Failing to record delivery dates, which makes it hard to prove the right period if the tax authority asks.
Questions
People also ask
Is the tax point the same as the invoice date?
Not necessarily, because the tax point is set by the rules for the supply and the invoice can be issued earlier or later.
Can the tax point change?
Yes, issuing an invoice or receiving payment within the permitted timing can move it, depending on the local rules.
Why does the tax point matter if the tax is paid anyway?
It decides which return the tax belongs on, which affects when cash must be paid and whether the return is correct.