Hi there looking for a little help if possible please.
We are in dispute with a company at the moment we owe them money and they owe us money.
They have sent us invoices in Jan, Feb and March which we havent paid but were included on our Jan-Mar Vat return (we were not in a dispute at this time)
They have also sent us invoices in Apr, May & June which again we havent paid but they havent been included on our Apr - Jun VAT return as we knew by then we were in dispute.
We have sent them an invoice for works we carried out which they havent paid. This has been included on our Jan-Mar Vat return.
To date invoices received from them during Jan, Feb, Mar, Apr, May & June total £12,327.61 inclusive of VAT. Our invoice was for £11,673.76
We also sent them a cheque for £653.85 which as far as we were concerned cleared the accounts. However today we have received a credit note from them for £5836.50
Can you please advise if we should be entering all invoices received and credit note received today on our VAT returns. We are confused by this situation and any help would be fantastic
The answer will be different if you use Cash Accounting or conventional accounting. In the first, VAT is accounted for when payments are made or received; in the second, VAT is accounted for on the date of invoice. Also, under conventional accounting, bad debt relief can be claimed after 6 months, and the earlier invoices you mentioned may be eligible for relief. Under Cash Accounting, if invoices are offset, then that is treated as if payment has been made/received.
The additional problem is your receipt of the credit note for £5836.50. Does that now mean that they owe you more money?
My guess, from your third paragraph is that you are using conventional accounting. (You entered invoices and claimed input tax, even though you haven't paid the invoices.) If so, then the later invoices also need to be entered, and input tax claimed. The credit note should also be entered.
Whether you have reverse any input tax (6 month rule, if invoices are unpaid) depends on if the credit note credits the early invoices (Jan, Feb, Mar).
Similarly, you must account for output tax on your invoices, even if unpaid. After 6 months, you can reclaim the VAT under the bad debt relief rule.
Sorry not leave it open-ended, but I hope that gives you some pointers.
Were you expecting such a large credit note? Does this settle the dispute in as much as the numbers are agreed? If so I would enter everything except the credit note and contra the accounts and allocate the payment you have made to clear the ledgers. I would also ask for payment to clear the credit note and probably only enter that once you have the money. Of course this is from the pragmatic point of view of cash flow (a different answer may be suggested if it is to do with getting accurate management accounts) Someone may well pick me up and say you have to enter everything according to the tax point but it seems a tad unfair to have a cash flow disadvantage because a credit note has come in late. I'm certainly not saying this is the definitive answer, more my thoughts on the matter and inviting other contrary thought!
On another matter, strictly speaking you should reverse any vat claimed on purchases that remain unpaid after 6 months...however I'm not sure many people do this!
We werent expecting the credit note. To be honest as far as we were concerned both accounts should now be clear. They are refusing to pay our invoice but have sent the credit note of £5836.50 for materials we bought from them to carry out the works. So as far as they think we still owe them £6,491.11
We have accounted for our invoice on our Jan-Feb vat return but havent received payment for this invoice.
So would you suggest claiming the rest of the invoices (which we havent paid) from Apr - June and also entering the credit note on our next vat return? Would i then have to reverse the invoices which the credit note relates to?
It gets a bit tricky since things are still unresolved. Do they have a legitimate reason for disputing your invoice? I think you have to act how your company believes is the correct situation, so if as far as you are concerned everything is sorted then just enter everything excluding the credit note since you are suggesting the credit note should not have been issued and therefore it will not be 'approved' by your purchasing manager. Of course all this is subject to change depending on the outcome of the dispute.
