VAT cash accounting - how to deal with an advance receipt

VAT cash accounting - how to deal with an...

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Client has made advance payments to a consultant prior to an invoice being received.

I assume I calculate the VAT element of the payments to include on the VAT return, if we are operating under cash accounting for VAT?

Thanks.

Replies (16)

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By shaun king
24th Jul 2013 11:58

Tax point date

The date of payment creates the tax point and the  consultant should issue you a tax invoice to this effect. From Cash accounting perspective the date of payment creates the tax point to recover the Input tax but you need a tax invoice. 

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By neileg
24th Jul 2013 11:59

Yes

In all probability you would need to do this if you weren't on cash account as the payments will create a tax point.

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By pembo
24th Jul 2013 13:05

horses mouth

.http://www.hmrc.gov.uk/vat/managing/returns-accounts/tax-points.htm 

Basically confirms as above.

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By Sarah P
24th Jul 2013 13:34

Thanks

@shaun - so do you think the invoice needs to reflect the payment date?  Because I don't expect it will.  For example, interim payment made 20 July, invoice dated 31 July for work undertaken in July.  

 

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By shaun king
24th Jul 2013 14:05

it should do

@Sarah

The invoice should reflect the payment date as that is the actual tax point but so long as the date is within the return period it will not be a problem

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Replying to Portia Nina Levin:
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By neileg
25th Jul 2013 12:56

Not stricly true

shaun king wrote:

@Sarah

The invoice should reflect the payment date as that is the actual tax point but so long as the date is within the return period it will not be a problem

You need to include the transaction on your VAT return that relates to the tax point which in this case is is the payment date. If the supplier raises a tax invoice within 14 days of the payment date then the tax point changes to the invoice date. If the supplier invoices later than 14 days after the payment, the tax point stays as the payment date regardless of whether the invoice date is in the same return period or not. If the supplier never invoices you then you can still reclaim the input tax if you have sufficient evidence that the price included VAT. A tax invoice is the best evidence but it is not essential.

The 14 day rule may be varied in special circumstances. For local authorities it is a 30 day window.

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By Sarah P
24th Jul 2013 15:28

Thank you

Much appreciated

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By shaun king
25th Jul 2013 13:37

it is strictly correct

Neileg, the basic tax point can be extended by 14 days but the receipt of cash creates an actual tax point and there is no override for that. See VATTOS3600

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Replying to Ruddles:
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By neileg
26th Jul 2013 10:03

Eh?

VATTOS3600 states exactly the point I made. The cash payment determines the basic tax point, the issue of an invoice within 14 days determines the actual tax point.

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By User deleted
25th Jul 2013 17:42

Questions ....

Questions are:

How can you determine what the VAT is when it is simply a payment on account 

How do you even know that the consultant is even VAT registered (or not withdrawn from VAT if previous VAT invoices received)

Anyway the consultant's eventual invoice may contain split rates of VAT - so how are these accounted

How do you deal with a change in the VAT in the interim between payment & invoice

Therefore, until you receive an invoice surely it cannot be possible to accurately determine the VAT due (if any)

Interesting - spoke to HMRC a few years ago on just this subject in relation to Sage 50 - where you must assign a VAT rate for a payment on account even though you don't know what VAT is. With Sage (cash accounting) - once you have assigned a VAT rate it is virtually impossible to change it if the evential invoice shows someting different

They said that no VAT arises until the invoice quantifies it by giving you a figure and that any payments should be put in gross (ignoring the VAT element)

Of course HMRC could be wrong - but can someone explain why you have to account for VAT before being able to quantify it - or know whether it even arises in the first place

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By shaun king
25th Jul 2013 20:46

Simple answer

You don't whether there is any VAT on the payment until you receive the tax invoice. The only indication maybe if the consultant has raised a request for payment stating that the amount requested includes VAT. The mere payment of the money does not confer any right to Input tax deduction, but once payment is made it creates a tax point, at which time the supplier should raise a tax invoice.

In order to get an indication of the VAT treatment of a payment I suggest getting the supplier to raise a request for payment before you send the funds. Usually you will either find that the request says inc of VAT or you may find a VAT number on the request.

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By neileg
26th Jul 2013 11:18

Hang on

If the advance payment is made against an indeterminate supply merely as a security deoposit then you can't know what the relevant tax rate is and there's no tax payable. If the payment relates to a known supply which may have a value that is not the same as the payment made then you do know which rate to apply.

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By shaun king
26th Jul 2013 11:25

it's consultancy

Not sure where a deposit comes in as the question states it is in relation to consultancy?

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By spidersong
26th Jul 2013 12:52

Actual Tax point

Neil although it's not clear from the manual I should think this sentence is the one Shaun was relying on: "An earlier tax point arises if the supplier issues a VAT invoice or receives a payment in advance of the basic tax point" which indicates that receipt of payment is an actual tax point rather than a basic tax point. In conjunction with the sentence "The basic tax point is always overridden by an actual tax point" earlier in that section of the manual.

 

I always prefer the law anyway so: S6 (3) VAT Act 1994 says services are supplied when performed/completed.

6 (4) says that if before the basic tax point [S6 (3)] an invoice is issued or payment received then to the value of that invoice or payment the supply is treated as taking place at that point.

6 (5) says that if within 14 days of the point in S6 (3) they issue an invoice then the supply can take place at that point "to the extent that it is not treated as taking place at the time mentioned in subsection (4)"

So the 14 day rule only applies where no invoice or payment have been issued in advance of the basic tax point, but a payment in advance of either performance or invoice always creates an actual tax point.

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By shaun king
26th Jul 2013 13:00

Succintly put

@Spidersong - could not put it better!!

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By [email protected]
27th Jul 2013 12:18

Cash accounting problems

 

I am very wary about posting payments/receipts under cash accounting unless an invoice is present.

General reason

Software packages generally create the vat entry on the payment/receipt. Sage operates this way.

Invariably when the payment/receipt is posted without an invoice there is a high probability you are guesing the vat treatment.  

The entry then gets left without an invoice for a couple of months as people get busy.

Invoice comes in and gets posted and the software package can throw up an error as the vat rates do not match, Sage does this. 

Then a problem to solve, Vat return to correct and entries to unravel.

I have seen this on more than one occasion. 

 

Theory is fine, but in practise controlling the scheme with invoices is the way to go.

 

 

 

 

 

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