VATTOS5110 - Actual tax points: payments: is the payment in respect of a supply?
A payment can only create a tax point if it is in respect of a supply. It is not sufficient to identify that money has changed hands. This is illustrated by the decision of the Court of Appeal in the case of British Telecommunications PLC([1996] STC 818).
Unless a customer specifically requested a refund, it was British Telecom’s normal practice to retain an overpayment in the customer’s account to be credited against future bills. Some overpayments were deliberate, but others accidental, for example where a customer paid the same bill twice. In upholding the decision of the Tribunal, the High Court found that accidental payments cannot be said to be made in respect of a supply and therefore do not create a tax point. This view was later endorsed by the Court of Appeal.
The direct impact of this particular case is limited to continuous supplies. Nevertheless it demonstrates the need to examine the circumstances in which the payment is made and to consider the significance of the contractual arrangements. In most cases it will be clear that a payment is intended by the parties involved to represent either partly, or in full,the consideration for a supply. The main area in which disputes on this point can arise is in the context of deposits and similar pre-payments (see VATTOS5120).