Retention monies - double entry query

Retention monies - double entry query

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Hi

A large housing organisation that builds its own properties retains an amount from the construction companies of around 1 - 5% of anything up to £7m.

The method for retention is - the contractor raises an invoice - minus the retention figure.  After a period of 12 months, the retention figure is payable to the contractor.  I've been informed that they get this IF they invoice for it.  Also, it is highly unusual for there to be a reason to withhold these monies to date as contractors have always delivered etc.

In my opinion this retention figure should be shown either as a current liability or a creditor in the balance sheet.

Two quick questions:

a) am I correct?

b) what do you think the double entry would be, eg debit contractor, credit retention fees? or am I being simplistic?

I'm waiting for a response from the relevant finance manager on this, but his initial response was along the lines of "they get it if they invoice".

thanks

Eve

Replies (3)

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By Richard Willis
08th Nov 2011 08:48

I think

that the purchase price should be grossed up and the retention monies shown as a liability in the balance sheet.  Most of these will be shown as current UNLESS a contract is completed on the exact accounts date, in which case it COULD be argued that it could not possibly be payable untill >1Y!  However this argument is tenuous and for the sake of consistency I would show them all as <1Y.

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By Eve 2206
08th Nov 2011 13:16

thanks Richard, that's helpful

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By Richard Willis
09th Nov 2011 09:44

Not sure about the VAT though!!!

I am not up on VAT on B2B construction costs; however in the normal course of business the full amount should really be invoiced on completion.  If this is VATable then the contractor would be out of pocket for the VAT for a minimum of 9 months.  I am guessing that construction of new houses is zero rated but no doubt someone will confirm.  If so there won't be any problem with the VAT man as no VAT would be deferred by invoicing late.

If there IS VAT on B2B construction costs then the VAT man will not be pleased as the VAT on the whole amount should be paid at the time of supply.

EDIT - Forget my last remark as, of course, the developer would then claim it back so no loss/deferrment of VAT!!

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