VAT tax point v accounting date

VAT tax point v accounting date

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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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By tom123
04th Oct 2014 07:34

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.

 

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By johngroganjga
04th Oct 2014 07:43

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.

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Replying to Jerome_Lane:
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By User deleted
13th Oct 2014 14:35

Extra work?

johngroganjga wrote:
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.

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Replying to Insolvency Practitioner:
By johngroganjga
13th Oct 2014 14:44

Extra work

BKD wrote:

johngroganjga wrote:
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? 

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By Accountant1960
13th Oct 2014 01:03

Accrued Sale

Many thanks for your comments.

The reason the client can not invoice in the same month is that the service provided is a 999 ambulance service that involves some outsourcing to 3rd party ambulance companies who do not invoice until several weeks after the event.

Therefore, a service provided to the NHS in December that the client had to outsource may not be invoiced until January because the amount (based on pence per mile and waiting time) is unknown until 3rd party invoices are received several weeks after the event.

The reason the client can not back date the invoices to December is that the NHS wants 30 days credit from the date of the invoice.

This means, as explained in the original post,  VAT may be being recorded in the incorrect period.

An accrued sale would work. Thank you.

 

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By neileg
13th Oct 2014 12:48

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.

Thanks (2)
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By mackthefork
13th Oct 2014 13:03

Also sounds like this is potentially..

neileg wrote:

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

 

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Replying to jcace:
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By neileg
13th Oct 2014 14:27

Not so sure

mackthefork wrote:
.. a continuous supply of services.

MtF

Except the OP said specifically supplied on 25th December.

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By User deleted
13th Oct 2014 15:05

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.

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By johngroganjga
13th Oct 2014 15:42

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!

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By User deleted
13th Oct 2014 15:54

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.

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By johngroganjga
13th Oct 2014 16:12

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.    

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By User deleted
13th Oct 2014 17:06

£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?

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