I have a client who, when he recieves a job enquiry issues what he calls a "Deposit Invoice". Essentially this is a very elaborate quote asking for 50% up front before work will commence.
If the buyer decides to go with the estimate they pay the 50% and this triggers the work to commence.
But if they decide to hang about and take a while to make their decision, the deposit invoice (elaborate estimate) has already been raised and the tax point has been fixed. As I understand it input VAT is recorded at this point and will have to be paid to the revenue regardless if it's been collected from the customer or not.
This doesn't seem like a very tax efficient way of working - especially if the customer decides against completing the purchase!
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I want to suggest a more efficient way of working, and I've come up with this - but I have no idea if it's correct or legal. I'd like you opinions, please :)
1. Client recieves job order and produces and estimate.
2. Once 50% deposit is recieved, raise a deposit invoice for that amount.
3. On completion of the job a request for payment of the balance is made to the customer by letter or statement etc
4. Balance Invoice is provided.
or
1. Client recieves job order and produces estimate.
2. 50% deposit is recieved.
3. On completion of the job a request for payment of the balance is made to the customer. (These "jobs" can have upto a 6 week lead-time for completion.)
4. Invoice for total amount is provided.
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my blog "the bookkeeper's in town - learning the hard way"
Client's may know when a sale has taken place but if you're getting invoices that are sometimes quotes, sometimes sales and sometimes the deposit amount is duplicated, it's too easy to over-declare VAT. I suggest they never, ever use the same book for quotes/estimates and sales/deposit invoicing.
Invoices are entered into the bookkeeping - Quotes/Est are correspondence.
If they're on 'Cash Accounting for VAT' then in this case there will be 2 Tax Points: Deposit received + Balance received
The point about the 6 week completion time is immaterial IF they're on 'Cash Accounting', as the VAT will be declared whether there is an invoice or not.
1. The quote/estimate would usually happen before a formal Job Order
2. A Job Order would trigger 50% deposit receiveable, raise a deposit invoice for that amount.
3. On completion of the job a request for payment of the balance is made to the customer by Balance Invoice.
This is perhaps one where you need to retrain the customer as there could still be duplication of sales amounts - always have a reference between any two invoices which relate to each other and it is good practice for the final invoice to show the total payable along with payments made.
If i've got the wrong end of the stick, let me know.
I particularity like your clarification of, "Invoices are entered into the bookkeeping - Quotes/Est are correspondence." I knew this, but it had never entered my head that my client might have got his wires crossed; because it's at this exact point that all of the trouble seems to occur.
One additional question: after the 50% deposit from the estimate is paid, invariably the job price changes (additions, mind changes etc.). How would you keep this tidy?
pDm
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my blog "the bookkeeper's in town - learning the hard way"
I'd consider triplicate invoicing to keep it tidy so that a copy can be attached to any paperwork/correspondence/quotes/diagrams etc regarding changes/additions etc; thus providing a trail throughout each job.
If they're on 'Cash Accounting' any further payment on account will be a tax point and to keep it regular, its probably sensible to always produce an invoice to match a payment received. It might be rare that three P.O.A. are received so this shouldn't be too cumbersome.
If they're not yet using Cash Accounting, I'd write to the VAT office telling them when you are to start even though you're not forced to.
What trade are they conducting, PDM so if I think of anything else, I can picture what's happening
Might be worth a read of this : http://www.hmrc.gov.uk/manuals/vattosmanual/vattos4210.htm
Hi Don - it's made to order worktops and surfaces - extremely bespoke from my understanding. Nobody else does what this company does (at least in the UK). As well as domestic instillations, they're quite often brought in as CIS sub-contractors for multi-national head quarter refurbs, etc.
Without wanting to take liberties here - what's the advantage of moving to Cash Accounting in this instance? I know they're on standard reporting at the moment (the accountant told me so!) but the business owner doesn't seem to be aware that there's even an option as far as VAT reporting is concerned.
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my blog "the bookkeeper's in town - learning the hard way"
It's a cash flow advantage. Not quite your situation but if customers take 4 months to pay, then at the moment, your clients cough up to HMRC before they've had the VAT.
The other side of the coin is that you can only reclaim VAT when this is paid out. Therefore both Outputs and Input claims are delayed but providing they're making a profit, there is a cash flow advantage.
No doubt, the Accountant has thought this through, if he's still acting, and he may disagree entirely with my record keeping methods lol.
I think the turnover threshold (where you cannot use Cash Accounting) is £1,350,000, and your clients may be above this. Make sure you happy with the 'Time of Supply' rules, as that may determine the best way to keep records.
