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VAT on customer prepayments, and whether the VAT element can be used to credit future actual invoices

Hi All.

I have a quick question regarding VAT on customer prepayments, and whether the VAT element can be used to credit future actual invoices so the customer has to part with less cash.

Example
If a customer prepaid £100 + VAT (£120) and an invoice was raised accordingly, but during the month used £200 + VAT (£240) worth of services, and an invoice was raised for £200 + VAT (£240), would the customer be obliged to pay a difference of:

A) £120 (so the full prepayment of £100 + VAT (£120) can be deducted from the actual invoice)
B) £140 (so only £100, and not the VAT element can be deducted from the actual invoice)

Option A obviously means the customer would part with less cash, and is certainly more attractive.

The reason we do things this way is because we ask for prepayments on an as/when basis from less credit-worthy customers but for ease of accounting, we'd like each customer (regardless of whether they are making prepayments) to receive an end of month actual usage invoice.

Thanks in advance.

Replies

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23rd Jul 2012 07:58

Why invoice?

Why are you raising an invoice when you are only asking for money and not supplying anything?

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By neileg
23rd Jul 2012 09:31

One reason

petersaxton wrote:

Why are you raising an invoice when you are only asking for money and not supplying anything?

VAT is accountable for on receipt of the deposit. Raising an invoice deals with this.

To the OP, if you raise an invoice for the deposit, then you should either credit this invoice when you raise the actual invoice or only invoice for the difference between the deposit and the final charge.

There is no difference in what the customer pays either way.

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23rd Jul 2012 10:03

Understood

But raising an invoice causes so much confusion.

When a invoice for goods or services is raised then what do you do? If there's VAT on the invoice it would be double counting - once for the invoice raised regarding the payment received and once for the invoice raised for the goods or service.

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By neileg
23rd Jul 2012 10:17

No

petersaxton wrote:

But raising an invoice causes so much confusion.

When a invoice for goods or services is raised then what do you do? If there's VAT on the invoice it would be double counting - once for the invoice raised regarding the payment received and once for the invoice raised for the goods or service.

Read the rest of my posting. All will become clear.

As a registered trader you have to be able supply either a tax invoice or a tax authenticated receipt for the deposit.

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23rd Jul 2012 11:37

Not convinced it's a good idea

neileg wrote:

petersaxton wrote:

But raising an invoice causes so much confusion.

When a invoice for goods or services is raised then what do you do? If there's VAT on the invoice it would be double counting - once for the invoice raised regarding the payment received and once for the invoice raised for the goods or service.

Read the rest of my posting. All will become clear.

As a registered trader you have to be able supply either a tax invoice or a tax authenticated receipt for the deposit.

So, instead of raising one invoice and including VAT on any payments that are received more than invoices raised you prefer to raise invoices when a deposit is received and an invoice when goods or services are supplied and a credit note to match the sales invoice for goods and services up to the level of the deposit?

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By neileg
23rd Jul 2012 12:03

Do you have a better idea?

It’s up to you Peter. You can just post the cash as a credit to the sales ledger account and then issue an invoice for the full amount leaving balance on the account.

However, the OP said that they invoice for the deposit so it’s already being done. Plus you still need to account for the VAT at the point of receiving the cash and the transaction may well cross the VAT quarter date and you need to issue a tax invoice or a tax authenticated receipt. So raising an invoice for the deposit does this for you. You then have the two options already discussed.

So just because there’s a small amount of hassle it doesn’t mean you can’t account for this properly.

How would you propose to do this?

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23rd Jul 2012 12:32

My better idea

I explained that on my last post.

"So, instead of raising one invoice and including VAT on any payments that are received more than invoices raised"

You only raise sales invoices for goods and services. At the end of a quarter you see if there is an overpayment. If there is you accrue for the VAT and reverse it the next day. This means you only have to worry about it every quarter. If the customer needs a VAT invoice I accept that there may be complications so you may need to look at this every month.

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23rd Jul 2012 16:42

Deposits

You're bound by VAT legislation to provide a VAT invoice if the receipt of the monies precedes the provision of the services which are quantified in your case monthly. Hence you're correct in issuing the invoice for £100 plus VAT.

At the end of the month you merely invoice the customer for £200 and deduct the deposit of £100 (net) and add the further £20 of VAT. You don't attempt to include the first £20 of VAT in the calculations.

Sorry if I've misunderstood where you're coming from but because you're bound by the VAT rules it does actually limit your options.

 

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23rd Jul 2012 17:24

You don't always have to issue a VAT invoice

"You're bound by VAT legislation to provide a VAT invoice if the receipt of the monies precedes the provision of the services which are quantified in your case monthly. Hence you're correct in issuing the invoice for £100 plus VAT."

Not true.

http://www.hmrc.gov.uk/vat/managing/charging/vat-invoices.htm#3

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By neileg
24th Jul 2012 11:13

@peter

Sorry Peter, that link doesn’t support your argument. Where a deposit is a deposit for a supply of goods and services rather than a security deposit then the tax point is fixed at the time of payment of the deposit or the time of invoicing for the deposit if that is earlier.

I don’t see how your proposals for dealing with deposits are any easier.

Still, you’re entitled to your view and I’m going to let this rest.

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24th Jul 2012 11:38

This is what the link says

"If you are a retailer, you do not need to issue a VAT invoice or receipt unless your customer asks for one."

This is different to your contention that you must issue a VAT invoice.

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