How to handle customer deposits from POS for VAT?

Tax point on customer deposits before sales invoice is issued - interaction between POS and accounts

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Due to our old POS system not doing everything we wanted in terms of e-commerce functionality we have decided to change to a new POS.  The new POS is not easily integrated with our existing bookkeeping software so we are also switching that.  I look after the bookkeeping and have been trying to get my head around how transaction data is exported / mapped from POS to bookkeeping.

In doing so I have paid more attention to the nuances of VAT accounting than in the past.  Not least because MTD is just around the corner.  Something I wasn't really conscious of before is the fact that HMRC operates on the 'cake and eat it' principle'.  In short the tax point when we issue a sales invoice for a credit sale (ie no immediate settlement) is the invoice date (not when we get paid - I appreciate we could move to a cash basis but that doesn't help with VAT on purchases so we will stick with accruals basis).  If we do not have an item in stock and a customer places an order we ask for a deposit.  I understand that the receipt of the deposit also gives rise to a VAT liability despite the fact no sales invoices has been raised.

So my question is how can we make sure the VAT liability on the deposit gets recognised in the accounting as the POS software only recognises the liability once a sales invoice has been issued.  I can only imagine doing a manual workaround which will no doubt lead to extra work and headaches.

How do others deal with this??!  (Old system was Checkout/AccountEdge - new system is Lightspeed / Xero or QBO - not decided yet on accounts side as still stress testing Lightspeed POS)

Replies (3)

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By smigzta
24th Feb 2019 16:09

I would recommend using Xero for your new accounting system.

When completing the bank reconciliation using Xero, you will have the option of creating a prepayment which attracts output VAT and feeds onto the VAT return. The payment also sits on the customer's account ready to allocate to an invoice when the time arises.

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Replying to smigzta:
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By nksimmons
24th Feb 2019 16:36

Thanks smigzta - I was expecting all customer accounts to be dealt with in Lightspeed by the front line team dealing with customers and that no detailed AR data would be maintained in Xero so I don't quite follow your suggestion.

Ruminating on the conundrum my thinking is to identify the total 'deposits' taken balance at the end of each quarterly VAT period and to do one single journal where I back out 1/6th of the deposits taken. Not sure at this stage how to deal with 'total value of sales and other outputs' (which will come through MTD measures in Xero for the VAT return) as for that to include the other 5/6th would probably mean recognising the revenues on the deposit which from an accounting perspective I don't want to do - at least not in the P&L (maybe I can do that from a BS account - but I'm not sure how Xero would handle that yet - have posed the question to Xero and Lightspeed, but no one there seems to actually have more than a passing knowledge of bookkeeping / tax!). I would then automatically reverse the journal at the beginning of next accounting period (so that I don't count the sale / VAT twice when it actually gets released once item is received and properly accounted for as revenue). So that from that point on my journal each quarter will be the net movement on deposits taken.

I think that will work - obviously keen to hear from others as I can't be the first person to have to figure this out (or does everyone just ignore the 'cake and eat it' principle?!).

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Replying to nksimmons:
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By smigzta
24th Feb 2019 17:26

Ah I see, I'm not fully familiar with Lightspeed but after a look at their website, it doesn't appear they have a deposit feature... annoying! Their workaround is to create an invoice and change the product description and template to show it is a deposit... not ideal but it would create the paperwork to give to the customer and it would feed through to Xero as a sales invoice and therefore deal with the VAT issue. Ideally you could link this specific template to a liability account in Xero such as 'Income in advance', inclusive of VAT, and therefore the sale isn't recognised on the P&L. Although once the actual sales invoice is eventually raised, this would need to be manually credited off using a credit note in Xero using the 'Income in Advance' account to reduce this balance and to 'pay off' the outstanding sales invoice.

You could create a journal like you have mentioned and re-do each month, but the deposit would still need manually reconciling to the bank at some point, and if an 'invoice' isn't put through Lightspeed this would not be possible. It's also not ideal if you wanted a clear record of customer's deposits - I guess you would need to keep a separate spreadsheet, which is still not ideal for your front line team.

I'm not sure how helpful this is! Just thinking of ideas.
It's definitely something you want to get set up correctly first time round, otherwise it could get rather messy!

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