1 invoice for multiple months of work

[Thomas1987]

Hi all,

 

Worked on a project that lasted around 4 months. It was agreed to split the fee over those 4 months (March - June). For simplicity on their records, they asked for one invoice which broke down the monthly payment schedule, but obviously under one invoice number.

 

As it crosses the "year end" line, and I'm trying to catch up on paperwork, I'm struggling to work out whether these 4 payments need to be declared for the next 15-16 tax year as they are listed on the invoice which covers that period, or 2 payments for 15-16, and 2 payments for 16-17 as thats when payment was actually made and agreed upon.

 

Any advice (apart from "get an accountant" which is next on the list!)

[Stuart91]

I'm not an accountant, but I think the thing that matters is when the cash hits your bank account.

[Brian]

I think you've just discovered why doing that is a bad idea and throws up all sorts of interesting accounting/tax issues. Try to get your head around 'time of supply' and 'tax point'.

 

However, in general, where an invoice is issued it is the invoice date that is important even where that invoice is issued in advance of any supply being made. So you should account for the whole invoice value in the tax year in which it was issued. If you run a company then you simply show in the accounts that you 'owe' your clients 'something'.

 

[paulears]

It's even worse if you are VAT registered on the standard scheme, because as Brian says, the date the invoice is issued is the key. It's common for me to invoice for the complete project at the start and then get staged payments throughout the contract term. For me I can live with that, and if it starts before the accounts year start date, the whole lot goes in that year, with any outstanding money owed marked down in my accounts as a debt. However for VAT it can often go badly wrong - invoice on the 30 September, and you have to pay the VAT to the Government on the total invoice before you've received anything at all. The people who receive your invoice claim all that VAT back, before they've paid you, so their situation is the reverse of yours, it aids their cash flow, and hurts yours.

 

I actually keep a buffer in the bank, earning zilch, to cover these crossovers so there's always VAT money ready to pay.

 

For non-VAT purposes, the only real important date is your year end, because that impacts on what you pay in tax - so all that invoice - which can be many thousand pounds for some contracts is treated as your income, even though they haven't paid it. However, it always balances out the year after. If you get an accountant, I doubt they'll even bother about it as to them, it doesn't matter very much. They might just advise to manage any purchases to get these into the right date chunk to counteract the impact on the tax. Mine usually calls me after Christmas and asks if I am going to be buying anything sizeable soon, and if I say yes he suggests buying now or delaying a bit, based on how things are going. I've been a bit frugal this year because I want to take money out of the business to fund a family holiday for the kids and grand kids, and the accountant reminded me this will spike my tax, as I normally reinvest spare dosh by buying new things, which this year, I've done far less. I really believe a good friendly accountant who can live with the weirdness of our industry is a sensible spend. I'm positive that mine saves me far more than he costs.

[timsabre]

It's even worse if you are VAT registered on the standard scheme

 

Paul, why don't you go onto cash accounting for VAT. My business is on cash accounting and I only have to pay the VAT when the customer pays me.

The only problem is I use Quickbooks for accounts and it doesn't fully understand cash accounting.

[Thomas1987]

I think you've just discovered why doing that is a bad idea and throws up all sorts of interesting accounting/tax issues. Try to get your head around 'time of supply' and 'tax point'.

 

However, in general, where an invoice is issued it is the invoice date that is important even where that invoice is issued in advance of any supply being made. So you should account for the whole invoice value in the tax year in which it was issued. If you run a company then you simply show in the accounts that you 'owe' your clients 'something'.

 

 

 

Understood - I had a suspicion it was that. As others say, obviously it'll balance out for next years books but certainly not something I'm keen on.

 

Fortunately not VAT registered so that headache is avoided for now.

 

Agreed on accountant - looking for one based around Preston/Manchester who, as you say, "gets it" - I'm a freelancer, doing a lot of bits, with long term contracts as well in theatre and majority of the money hits in summer!

[Stuart91]

+1 for cash accounting when it comes to VAT. It's hugely advantageous.

[paulears]

Not for me - my accountant advised not to do this as long as I have the cash buffer because my income is very spikey - big chunks at specific times of the year but usually two quarters of the year I get VAT refunds at just the right time, which wouldn't work with cash accounting, and the software I use won't do it either - so for me, the system works , and reconciling invoices becomes less important. I know it's good for many people, but it's not quite so hot for me.

[eviljohn2]

Paul, it's possible to account generally on an accrual basis and just do your VAT on a cash basis. We do the same (and I believe it's what the others are alluding to also).

 

If your software doesn't work then that's a problem but as mentioned above - it just means it's impossible to fall into a VAT black hole but remains largely transparent to any other accounting procedures. The catch is that it's only for business with turnover under £1.35million.

Details here: https://www.gov.uk/vat-cash-accounting-scheme

[paulears]

£1.35 million? Damn it, just over! (I wish)

 

Thanks - I'll mention it to the accountant and see if he thinks a change is necessary.

P

[Paul TC]

When I was running a business, I switched to cash accounting due to some potential issues around invoices being issued which were going to be disputed, (due to contract terms), it was possible to reclaim VAT under the normal rules, but it was a case of giving it over and claiming back.

[DanS]

Try Xero for the cash accounting...

 

Doesn't matter what the Sale or Purchase date is if you sent to CASH BASIS, Xero will account for it when It's reconciled with your bank. Also, the bonus for us, Xero is integrated into our rental system so It's streamlined the entire admin process.

I've tried QuickBooks but found it so complex to work with.

 

It's even worse if you are VAT registered on the standard scheme

 

Paul, why don't you go onto cash accounting for VAT. My business is on cash accounting and I only have to pay the VAT when the customer pays me.

The only problem is I use Quickbooks for accounts and it doesn't fully understand cash accounting.

 

Don't forget... unless I'm mistaken, with VAT you can reclaim/process transactions from up to 6 month previous (so if you missed something off 1 return you can add it to the next). :)

 

Only downside to accrual basis is if you have, for example, a £5,000 invoice issued on the 29th Jan, and your year end for 16/17 is 31st Jan, then you would have to pay the Corporation tax etc... in the 16/17 period rather than when the money hits the bank (which would be I the 17/18 period - unless they paid immediately)

Paul, it's possible to account generally on an accrual basis and just do your VAT on a cash basis. We do the same (and I believe it's what the others are alluding to also).

 

If your software doesn't work then that's a problem but as mentioned above - it just means it's impossible to fall into a VAT black hole but remains largely transparent to any other accounting procedures. The catch is that it's only for business with turnover under £1.35million.

Details here: https://www.gov.uk/v...counting-scheme