QuickBooks VAT Cash Accounting & Advance Payments

Advance payments do not report on VAT return at the correct time for VAT Cash Accounting

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Is anyone aware that the VAT Cash Accounting in QuickBooks Online doesn’t actually record the VAT at the right time (i.e. for HMRC Compliance) with on-account payments?

We have a client that receives a lot of up-front payments from their customers for many months, then when the customers invoice is raised, the payments are applied to it to reconcile that customers account. In QBO that is set up with VAT Cash Accounting, the VAT does not get put onto the VAT return until the point that the invoice is raised, and payment applied to it!

The VAT should, of course, get reported at the point of payment – but when receiving a payment into an Accounts Receivable account, QBO doesn’t let you do this. I suppose one solution for my clients file would be to invoice monthly – but this is not always convenient – and being a very dominant accounting software package – I’m gobsmacked that this happens.

As a workaround to be HMRC compliant, we are now having to calculate all ‘unapplied payments’ at every VAT quarter, and add in the VAT with an adjustment, then make sure we reverse it out again later, when the payments are applied in QBO, so that our client doesn’t pay the VAT twice.

Does anyone else have a better work around than this and is anyone else aware of this? (QuickBooks are, because I’ve asked them!) More importantly, knowing that QBO has now been approved for HMRCs MTD - does anyone know if HMRC are aware of this – and maybe just accept it?!

Replies (11)

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By Matrix
10th Aug 2018 14:04

Your points may well be valid but surely the cash accounting scheme is to delay the payment of VAT which would otherwise be due under standard VAT accounting? Would the client be better off moving from the cash accounting scheme?

I don't do VAT returns on QB but use FreeAgent and Xero and expect they would have the same issue - I don't see how they would record the VAT on a cash basis for an invoice that has not yet been raised since all the sales and VAT are based on invoicing and not payments to customer accounts.

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Replying to Matrix:
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By Julie.T
31st Jan 2020 16:01

The tax point is date of payment or invoice (whichever is earlier). If you have received the cash and not raised an invoice, it still needs to go on the return, this advice is therefore wrong. Under standard accounting for VAT, the client must account for VAT on all sales and purchase invoices with a tax point in the quarter and all payments and receipts on account in the quarter where VAT is applicable.

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Replying to Julie.T:
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By Matrix
31st Jan 2020 16:07

It wasn’t advice, I said the tax issue was valid. I questioned why the business was on the scheme. And if they choose to operate this way they should get software which can deal with it.

Anyway why reply now?

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Replying to Julie.T:
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By Simon D
18th Oct 2020 00:36

Yes, that is my understanding exactly. The payment is always earlier so no advantage to using standard VAT. I just wish I'd known QBO couldn't cope with VAT cash accounting

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Replying to Matrix:
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By Simon D
18th Oct 2020 00:33

As mentioned below, ALL payments are in advance (the invoice has always been raised but is dated the date of the event) so I opted for cash as I'd hoped QBO would be able to deal with this automatically as opposed to me having to run a report for advance payments and post manually. Little did I know that QBO would be unable to do this. Whether cash or accrual, the VAT return would be identical.

What I really need help for is the flawed workaround and how to deal with the remaining debit in the VAT Control account after making my adjustment.

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Replying to Simon D:
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By Matrix
18th Oct 2020 08:20

Isn’t it VAT paid in advance? So the opposite of deferred VAT. You could set up a current asset for this.

Although my thoughts above from a few years ago still stand, why not move to software which can deal with this.

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By LadyofLedger
10th Aug 2018 14:18

That's a good point about the client moving to standard! I haven't seen anything in the account as to why they would have elected for VAT Cash Accounting up to now.

The client imported from SAGE and that was set up with VAT Cash and payments on account being VAT at standard rate. (this can be chosen on set up apparently), so thats how this has come to light - because of the crossover.

I would be interested to know if Xero and FreeAgent are the same.

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Replying to LadyofLedger:
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By Simon D
18th Oct 2020 00:27

Thanks for the reply. The reason I set them us as VAT Cash Accounting was because ALL their payments are in advance so the tax point for VAT would be the same whether cash or accrual. I thought that by opting for cash, QBO would be able to do the leg work for me as the alternative under accruals would be for me to run a report for advance payments each month and follow the steps I mentioned in my OP. Little did I know at that stage that I would have to do the very same thing for cash because QBO is unable to calculate this correctly.

I noticed in my hours and hours and hours of research before posting that you had a similar issue and had found a workaround? I'be be really grateful if you would check my workaround and comment on the unknown double entry for the VAT Control account or maybe share your workaround? Many thanks in advance

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By Friendly Bookkeeper
27th Sep 2018 14:24

I'm hoping to re-awaken this query, as we have inherited a client with exactly the same circumstances.
We have already decided to talk to the client about moving to accrual accounting, but in the meantime (and should this crop up again) , do we need to carry out the manual adjustment, or would HMRC accept the returns as Quickbooks produces them?

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By Simon D
18th Oct 2020 10:26

It appears I've posted on this thread after asking a very similar question last night having thought they were replies to my own question! My defence was that it was late on a Saturday night. Apologies for any confusion.

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By Manchester_man
07th Oct 2023 13:41

This is yet another failing of Quickbooks Online. Having exactly the same problem. Xero deals with this perfectly.

For anybody struggling with this, here is QBS ridiculously overcomplicated solution:

https://quickbooks.intuit.com/learn-support/en-uk/help-article/service-i...

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