My client sells franchises in his business, one of his franchisees has ceased operating and whilst taking deposits from customers had not ordered the goods to fufill their orders. Consequently my client has taken on the obligations to fufill these orders and has ordered the goods and paid the relevant deposits to the supplier himself accordingly. The franchisee is now paying my client the deposit monies - am I right in thinking that the deposit monies being paid to my client from the franchisee should go through his books as sales and should attract VAT accordingly with the covering paperwork being a vat invoice to the franchisee for the total amount of the deposit monies?
Client Mr A sells franchises. Mr B is a franchisee
Mr B went out of business
Mr A 'ordered' and purchased supplies from Mr supplier to fulfil Mr B's orders Mr A fulfilled orders from Mr B's customers
Mr B is repaying Mr A for supplies purchased from Mr supplier
You should really refer to the legal contract between franchisor and franchisee to decide what the nature of these transactions should be. For instance, will the amount paid to the supplier qualify as a loan to Mr B? Who is keeping the profit from the 'sales'?
If we pretend prima facie that there's no such contract, then: Mr A made sales to Mr B's customers - Sales Mr A purchased goods from Mr Supplier - Purchases
Now, why on earth is Mr B repaying Mr A if he's gone out of business?! Here's another scenario: Mr B made sales to Mr B's customers - Sales in Mr B's books Mr B purchased from Mr Supplier - Sales in Mr B's books Mr A paid Mr Supplier - Loan to Mr B Mr B is repaying Mr A - Repayts of loan
