Assume a client provides a service, at the standard rate of VAT, on 25th December.
The invoice is issued 10 days later for £10k net; £12k gross.
The accounts for December should reflect the sales made in December.
Therefore the turnover of £10k is reflected in the December P&L.
If the tax point and the date the service was physically supplied are the same, then the corresponding debtor would be £12k and the finally entry would be the £2k VAT liability. All straight forward.
However, if the date of supply is the date the invoice was issued and not the physical date of supply (as would normally be the case for invoices issued between 1 and 14 days after the supply takes place) with a VAT quarter ending in December and with the tax point now being in January. The above transactions in Sage 50 would record the VAT in the incorrect period.
Would one possible solution be to record the Debtor net of VAT in December and record the VAT liability when it arises in January:
Cr Sales 10k December
Dr Debtors 10k December
Dr Debtors 2k January
Cr VAT Liability £2k January
Replies (13)
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Use a journal
You should use a journal, rather than messing around with debtors.
It would be Dr - Amounts recoverable / accrued income (BS)
Cr - Sales - (P&L)
Two questions though:
Why are you not raising the invoice dated in December - you can continue to raise invoices dated in the month after the calendar has moved on though?
If I was your customer, and you worked for me in December, I would be expecting an invoice dated December.
Not quite sure what I am missing here - unless you are just trying to delay vat payment etc - which seems a bit artificial.
I do use the above approach during my month end close, where we make a bit of a miscalculation on cut off etc, however.
What you have here is a straightforward accrued sale (i.e. a sale made in one period invoiced in the next) which indeed you accrue net of VAT.
But by delaying the invoicing you are just making extra work.
Extra work?
What you have here is a straightforward accrued sale (i.e. a sale made in one period invoiced in the next) which indeed you accrue net of VAT. But by delaying the invoicing you are just making extra work.
Perhaps, but depending on the amounts - OK, not huge in this example - there could be a significant cashflow advantage.
Extra work
What you have here is a straightforward accrued sale (i.e. a sale made in one period invoiced in the next) which indeed you accrue net of VAT. But by delaying the invoicing you are just making extra work.Perhaps, but depending on the amounts - OK, not huge in this example - there could be a significant cashflow advantage.
I mean extra work in computing the accruals at each period end, but the OP has since explained why the invoicing is delayed.
But why does delaying invoicing produce a cashflow advantage? Surely the opposite is more likely?
Being pedantic
The tax point is the earliest of:
The supply of servicesThe paymentThe invoice date
So regardless of how long it takes the subcontractor to invoice, the correct tax point is December.
Edit: as the OP pointed out to me, if the tax invoice is raised within 14 days of the basic tax point, the invoice date becomes the tax point.
Also sounds like this is potentially..
The tax point is the earliest of:
The supply of servicesThe paymentThe invoice date
So regardless of how long it takes the subcontractor to invoice, the correct tax point is December.
Edit: as the OP pointed out to me, if the tax invoice is raised within 14 days of the basic tax point, the invoice date becomes the tax point.
.. a continuous supply of services.
MtF
Not so sure
.. a continuous supply of services.MtF
Except the OP said specifically supplied on 25th December.
Depends on the timing, John
If he raises invoice on 25th Dec, that is the VAT point and VAT falls into Dec quarter. Raise invoice on 1 Jan instead and that becomes the taxpoint. So, yes, he may have to wait a few more days for his money, but he'll have the VAT in his bank account for a full further 3 months.
You are only talking about the VAT! A somewhat more powerful effect on cash flow is when the customer pays the invoice, which delaying invoicing is never going to accelerate!
Depends what you mean by "only", John!
Delay receipt of £10k by 6 days versus having £2k in the bank for an extra 90 days? If I've no cashflow worries, I'd rather the second. If cash is critical, then I'd agree about wanting the invoice settled as early as possible. I did say that there could be significant cashflow benefits in delaying the invoice, depending on the amounts involved. I did not say that a delay in invoicing was always going to be beneficial - clearly there will be cases where it is not. But you might also find that the customer in my example would pay on 31 Jan in any event - it all depends on individual circumstances.
The gross receipt would be £12,000 of course, not £10,000. My former firm used to stimulate billing by saying that as business clients tended to pay invoices at the end of the month following that in which they received them, a delay of only a few days (over a month end) in raising the invoice might delay payment by a whole month.
£10k, £12k - whatever
a delay of only a few days (over a month end) in raising the invoice might delay payment by a whole month
The key word in that sentence being might.
Just as the key words in my original point were could be. We've been told that the customer in this case wants 30 days' credit. So delaying the invoice by a few days would in theory affect payment date by the same few days - yet delaying payment of the VAT by a full 3 months.
I think we're agreed that sometimes it would help, sometimes it wouldn't - can we drop it now?