A new client of mine carries out hair transplants and their terms and conditions state the any deposits are non refundable.
Is the deposit recognised as revenue at the time of the hair transplant or when it become non refundable which is immediately on payment ?
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This is a stage payment against provision of a service. FRS102 23.14 says that revenue should be recognised on a percentage of completion basis.
Prior to procedure, 0% of work has been carried out and therefore revenue to be recognised is nil. You could maybe say such as suitability assessment etc has been carried out and therefore a small percentage as revenue.
but if the service is never even started this argument would hold that 0% should be brought into account. so is there a rule for cancelled transactions as indicated here where no service is performed? But TAXISALWAYSTAXING's answer below is probably correct
Until treatment is carried out the deposit paid is deferred revenue (ie a liability in the balance sheet).
To take any part to revenue, it would be necessary to show that there is no remaining liability to customer either to carry out work or refund payment. It's a matter of judgement how long that liability should be held, but I would suggest at least 12 months from scheduled start of treatment.
I would leave as a liability till the service is performed.
If your client can't or doesn't perform the service for whatever reason I think you will find the consumer is likely protected and the non refundable deposit is refundable (including in some cases if even they cancel)
So is he in fact charging £1k or some proportion as a consultation fee?
What does his contract state? Maybe he needs to strengthen these terms.
Well then you have changed the question. Is it a deposit towards the cost of the treatment or is it a consultation fee.
Is the consultation fee free of charge, effectively the sales pitch, or is the deposit a requirement to get the consultation (I would guess the former or he won't get much business)
So his terms and conditions don't state that any deposits are non refundable, they state that £500 or 50% is refundable?
Is there a reason you or the client are keen to recognise the income earlier?
I stick with my original viewpoint and would treat full amount as deposit until either the service is provided or the obligation to provide the service is cancelled.
Initial consultation is free but should the client want to go ahead he would pay £1K deposit
If the client decides not to go ahead he would only get £500 refunded as the T&C says that £500 is towards consultation,
The initial consultation isn't free, Jim, is it? It's £500.
The initial consultation is free. Only if he goes with the hair transplant then he will pay the 1K. If he decides not to go ahead he doesn't have to pay £500 separately
Jim - that's not the reality, is it ? £500 is never, ever, ever going to be refunded.
It's revenue at the point of receipt. Forget the weasel words in the Ts and Cs.
The initial consultation is free is irrelevant really then isnt it. Its just like having a chat on the street corner.
If they decide to go further then £500 of the £1000 paid is the fee for the consultation.
The initial consultation is free is irrelevant really then isnt it. Its just like having a chat on the street corner.
If they decide to go further then £500 of the £1000 paid is the fee for the consultation.
Yes, that's a better analysis.
But once the £1000 is paid, £500 is immediately revenue, imho.
ok but what about taking the whole amount due to for the service including the 1K deposit and splitting it between consultation, operation and aftercare based on % of work completed ?
Maybe - but it doesn't change my view on the first £500. And good luck making that judgment. You're going to be heavily reliant on your client, are you not ?
Do you now agree first £500 is income immediately it’s paid?
Surely the balancing £500 becomes income at the next stage of the process? Not the aftercare. Surely that comes from the final tranche of the amount paid.
What is classed as aftercare/how long is that provided for/How much is being set aside for the aftercare? How will you get the information you need to allocate appropriately?
[quote=Leywood]
Do you now agree first £500 is income immediately it’s paid?
I don't agree, but lets be honest, who is going to challenge it.
Whether or not any of the deposit is actually refundable is really a question of consumer law rather than accounting.
As previously stated, if the price of £5k covers consultation + treatment, revenue should be recognised on a percentage of completion basis or similar. I don't think the treatment is likely to be 20% complete at the end of the consultation, so some part of the deposit should be deferred.
How long does the treatment take? If it's more than a one-off procedure, you should also think about the timing of recognising the rest of the revenue. And also whether any sort of warranty provision might be required.
Not if the consultation is free - who is going to walk in somewhere and pay £1000 to be told they are not suitable for a hair transplant... But if that's what happens then its a great business model.
The responses have got a bit out of sequence. I was answering on the basis you're dealing with a corporate client reporting under FRS. It sounds like you're actually dealing with a sole trader (not my expertise) and I think you can be a little more flexible with accounting standards.
Don't forget that the deposit might be creating a tax point for VAT - no idea if VAT is chargeable on hair transplants though so might not be relevant!
Most cosmetic treatments involve medical procedures ... the question is whether you can point to something explicit in the VAT guidelines (or preferably the legislation) to support your assertion that hair transplants are VAT exempt?
In terms of general interpretation, the NHS says "A hair transplant is a procedure to move hair to an area that's thin or bald. It's not available on the NHS because it's cosmetic surgery."
Note: HMRC's starting point remains that VAT exemption for medical services applies only where "The primary purpose of the services is the protection, maintenance or restoration of the health of the person concerned".
You would think hair transplants would be cosmetic treatment but its considered to be a medical procedure
I think you will find it is a cosmetic medical procedure, and therefore subject to VAT.....unless you can show valid reasoning why it is not.
Medical procedure on it's own probably isn't enough, as I hinted in an earlier post. Have a look at Skin Rich Ltd v HMRC [2019] TC7310, Most would consider botox & nail fungus treatments as medical procedures but the tribunal concluded not.You would think hair transplants would be cosmetic treatment but its considered to be a medical procedure
What is your authority for the conclusion that hair transplants are within the exemptions?
I agree with 'Tax etc...' terms and conditions can state almost anything, but it does not matter much if such a term is held to be unfair. The law over-rides any T&Cs.
Interesting.
I see a few posts here trying to persuade the OP that 50% of the initial £1,000 is income straightaway, as opposed to the presumption on their part that Jim's client wants it to all be a deposit so no income straightaway.
That would be great if Jim hadn't also posted that he/his client wanted to take all £1,000 as income straightaway as the client is after a mortgage......
Not comfortable with the non returnable deposit clause when say the clinic fails to proceed (becomes insolvent/whatever)
It seems to me for the client this is a complete service (consultant/apply/aftercare) but in such an event he/she merely gets a consultation which is likely useless being taken to another clinic should this clinic default.
It is years (Aberdeen Uni 1984-1985) since I studied (poorly) the Unfair Contract Terms Act 1977 , no doubt there has been intervening legislation, but not sure, without professional legal input, if what the contract has written within it legally actually matters.
You say the deposit is non-refundable. Therefore it is forfeited if the transaction is not carried through. HMRC Business Income Manual BIM31110 says that "The deposit should be recognised either when the goods or services are provided or when it is reasonably certain that no goods or services will ever be provided and the deposit will be forfeited."