VAT and Deposits - The Book-keepers Forum (UK)

alpal1971 · Member

VAT and Deposits

Cheshire · Master Book-keeper

Hi Alison
We ask newbies t provide an intro, bit on background, bookkeeper or Accountant, professional body, how far into exams, where based, that sort of thing.

is the whole deposit refundable, or just a portion and what percentage if the customer changes their minds? Hint you need to show the liability.

-- Edited by Cheshire on Wednesday 25th of May 2016 11:32:38 PM

alpal1971 · Member

Thanks Joanne

I've edited my post to add my experience levels.

Isn't the liability part the customer account though? If they decide not to proceed with the whole of the project, then the remaining deposit is returned. It's a debtor, but the wrong way round. There is never a time when the whole deposit is returned, as the plans are agreed at the start of the projects.

Cheshire · Master Book-keeper

Hi Alison
Welcome to the forum! Good to have more people on board and I hope you enjoy the 'madhouse' as much as we do!

I would suggest, if you havent already, that you have a read of her contracts/terms and conditions she issues to clients (and they shouldve signed) as to when the ability to claim a deposit back ceases.

The problem you have is that showing the balance on a customer account means it is showing as an asset. Funds received in advance are liabilities and only when your side of the contract is fulfilled can you move the amount to sales.

So when you receive the funds you need to:-

Dr Bank £50k
Cr Liability account ( call it deposits received) £41666.67
Cr VAT £8333.33

Care - you mentioned £10k VAT above, but if you received £50k to the Bank then the VAT would be inclusive so use the VAT fraction to work the VAT out.

When your side of the contract has been fulfilled then

Dr Liability account
Cr Sales
No need for any VAt at this stage.

The initial paperwork (invoice) for the deposit to the customer should have the VAT on it and any drawdown/usage or whatever you want to call it from the deposit documented to customer should not reflect the VAT. Do you even need to document it to the client - I wouldnt! Storing up allsorts of problems knowing how moany such clients can be!)

Im not sure how you process anything in Kashflow so cannot advise the specific mechanics for that piece of software. I use sage, so can explain it from there if you wish, but it will be much later today/this evening if I get the chance.

Eg - when you post your invoice for the clients £50k deposit - dont code it to trade debtors, but instead direct to the liabilities ''deposit account'' - saves on journals.

Ive done this for a couple of kitchen companies in the past.

HTH

alpal1971 · Member

Thank you Joanne - such a great answer, and I'm almost there..

But:

The first step you mention:

Dr Bank £50k
Cr Liability account ( call it deposits received) £41666.67
Cr VAT £8333.33

Yes, totally get that. What baffles me, it that the client had paid £50k, so they'll want to see £50k on their statement of account. I don't use Kashflow to send statements as my designer wants a spreadsheet with running total. So, I would show the £50k in the deposit column, and then a column for hours and one for materials. I show every item with the VAT included.

Let me take the example further to show you my confusion!

Scenario: The interior designer buys a sofa for £20k which includes VAT. There is no mark up, she's simply buying it and passing it on.

Double entry is -

Dr: Purchases £16,666.67
Dr: VAT £3,333.33
Cr: Bank £20,000

Then, to bill the customer:

Dr: Deposits Received £16,666.67
Cr: Sales £16,666.67

If we look at this from the client's point of view, they think they still have £30,000 on their account for her to play with. However, the balance on Deposits received is actually only £25,000.
Which is correct?
Am I not going to get the point that my client (the designer) takes a hit by running out of deposit. How does she explain to her customer what she has to spend?

I hope you see my dilemma! Thank you SO SO much for your help so far.
And thanks for pointing out my error on the VAT in my first example disbelief

Thanks,

Alison

-- Edited by alpal1971 on Thursday 26th of May 2016 11:55:43 PM

Cheshire · Master Book-keeper

Hi Alison
Sorry I didnt get back on here yesterday and this is just a quick one for now (proper response hopefully tomorrow when I have less mitherations from clients!)

Couple of quick questions to clarify or just out of nosiness.

Why no mark up on the sofa? She is effectively losing money here? As she will take time to source it, order it, pay for it. What if the buyer changes their mind? What if she buys a less expensive item from a non registered VAT business.

I seem to recall something about VAT on items bought and sold in this way, but cant for the life of me remember just what it was at the mo, worth a bit of digging. Might be worth posting on a separate thread (at least then this will entice our resident VAT expert out in case he isnt reading this).

When you use Kashflow - is the only way to post to customers/suppliers via doing invoices and credit notes? (Just checking as thats what Sage is like and then aids the answer!)

What triggers the next instalment from clients (eg it just balance on completion, 30 % after xx ??)

Presumably this isnt a whole quote for the job if she is specifying the need to show her clients how much they have incurred for hours completed? If she does less hours than advised to client do they get a refund?

Any other useful information you have on how the contracts work would be good as Im sure Ive missed something in my rush this morning!

Cheshire · Master Book-keeper

Knew there was something else....re Kashlow. Can you do backups and restores? For you to test things out or more to the point of you do it wrong?

alpal1971 · Member

Hi again

Thanks so much for your continued help. I can't tell you how great it is to share this issue and know that you understand me!

Firstly, no, Kashflow doesn't offer backups as such. They do have an electronic back up, but it's consolidated, rather than detailed.

Secondly - the mark ups. She only marks up on items where she benefits from trade discounts. She is quite new to the industry, and her clients started off as friends, and I think she struggled with charging more. She is getting better though, and she does bill them for her time @ £60 an hour, so she is getting income somehow. If she buys an item from Ebay, then she doesn't make on it, as you say, she loses out because she's paying the VAT on the sale, but not claiming back on the purchase.

However, the HMRC guidance on VAT on items like this is that if you are acting as an agent (i.e buying the goods on behalf of the customer, having them delivered to their address, and not charging any more for it) then you don't need to charge VAT on items that you didn't pay VAT on. So she has a get out there.

In Kashflow, in each customer record, there is an 'advance payment' section. You can enter an amount in there and it creates the following: DR: Bank CR: Customer - hence how it keeps a record of amounts left on their account. They say you shouldn't account for VAT at this stage, and I believe this to be wrong. I've spoken about it with them, and they are looking into it.

She sets payment plans for her customers, which they all stick to. If she gets behind on the project, she offers to let them defer payment, but they never do. She has yet to finish a project with a surplus, but I am sure it will happen at some point. Her clients are wealthy (we are talking monthly top ups of £50k over 6 months) and seem quite happy to just let her get on with things.

In your previous message you mentioned about recording the sales of items to her customers (i.e a sofa), and you said 'no need to record VAT at this point'. I agree with that, but it's impossible to raise an invoice and get the profit correct.

Example:

She asks the client for £60.00

Journal (if not listening to Kashflow's advice)

DR: Bank £60.00
CR: Deposits Received £50.00
CR: Output VAT £10.00

If she then buys goods for them to the value of £48 (inclusive of VAT), I raise an invoice which generates:

DR:Deposits Received £48
CR: Sales £40
CR: Output VAT £8

Now, I'm duplicating the Output VAT aren't I?

When I submit my VAT return, I'd submit it as £10.00 due to HMRC (assuming that she bought and sold the item with no mark up). What do I do with the £8??

Thanks again - I know you must be mega busy

confuse

Shamus · Forum Moderator & Expert

Hi Alison,

this really sounds as though it is getting tied up in knots over the VAT plus your client doesn't seem to have great business acumen!

The confusion in this thread seems to be that generally deposits are taken in advance of defined goods or services so the tax point is created at the point the deposit is received.

In this instance the deposit does not seem tied to any particular obligation and seems more akin to a loan than a deposit. This creates a confusing hybrid scenario where the business both owes the client the full £50k and is also creating a tax liability so the accounting wequation is out of balance by the sum of the VAT.

The problem is that thinking about that has confused matters away from the nuts and bolts of what is at heart a relatively straight forwards transaction... Not your fault. I've had it so many times myself where you understand a scenario exactly then start talking to the client who confuses matters and puts you into a position when you need to sit back and look at what you are actually trying to achieve.

The key is to always think about the position in the final financial statements and work backwards from that position.

Lets take a step back and resimplify the whole process.

The part that is missing from your scenario that ties everything together is an initial VAT invoice for the deposit.

Lets take a simple example of the process through from start to end.

1) The initial deposit. lets keep the figures simple and say the deposit amount is £45k

Create a deposit invoice as follows :
Dr Bank £45k
Cr Output VAT £7,500
Cr Deposit Account £37,500

2) Actual supply of Good or Services Invoice. Goods sold to client for £15k

Cr Sales £12,500
Cr Output VAT £2,500
Dr Deposit Account £12,500
Dr Output VAT £2500

The scenario now is that we have :

Sales £12,500
Customer Deposit £25,000
Output VAT balance £7,500
Bank £45,000

3) Return unused funds to client

Dr Deposit Account £25,000
Dr Output VAT £5,000
Cr Bank £30,000

See how the full £30k is returned to the client, not just the £25k.

So then we have the remaining balances of

Sales £12,500
Customer Deposit £0
Output VAT balance £2,500
Bank £15,000

4) Pay VAT liability

Cr Bank £2,500
Dr Output VAT £2,500 (not directly but that will be the result of the VAT processing within your software)

Remaining balances :

Sales £12,500
Bank £12,500
Output VAT £0
Customer Deposit £0

Thats not taken your exact scenario values (me being lazy and trying to avoid playing with the pennies) but it gives you the full chain of events as it should exist and hopefully explains why the bit that you seem to have missing is the interim invoice for the customer deposit (which must not be recorded as sales).

With small adjustment the above also works where the sales are more than the deposit. As noted above, the key in this is looking at what you are attempting to achieve in the financial statements and then working backwards from that.

Can't give you the answer specific to your software but I would suggest that if your software cannot do the above then get better software (I use VT Transaction+).

Hope that helps. Sure that if I've made any silly mistakes in writing the above out (its been known to happen!) someone will quickly correct me.

kindest regards,

Shaun.

Cheshire · Master Book-keeper

Thanks Shaun

Cheshire · Master Book-keeper

I had a kitchen company I did this for, but quite a while ago, so I was playing with it through the Sage practice mode and typing up my answers as I was going along, using the allocate through customers/invoicing and had a whole convoluted response about 3/4 of the way there, then actually thought - why not just do it via journals rather than having customers, then re-started my sage to check I wasnt missing anything when I lost all the response I had done on here!!

About ready to chuck the PC out of the window.

When I had the kitchen company I did this for, I did set it up with customers, hence my original eg of the invoice, but of course over the space of a couple of years they ended up with a LOT of customers and personally I thought it started to get unweildly, because after a while they just had a lot of customers with nil balances. Now sage can allow you to hide them so a part of me if I was to do it again would do it the same way. But - given this business seemingly involves more convoluted ways of doing things than that one did (ie more deposits over several months, selling things at cost, providing billing updates for hours worked and for each item bought, rather than just setting an overall price for the job and then making additional sales as required), I do think its better if you just go for journals and a spreadsheet. I had a spreadsheet anyway - was good to monitor the actual deposit as you go along, also that it matches your software given the VAT issue (plus just ensured I didnt forget to key something, as they used contracts rather than invoices!) Plus if you are issuing statements to customers, then you can tie these individual spreadsheets in with the master one so you can do sense checks every week or month.

-- Edited by Cheshire on Sunday 29th of May 2016 01:46:36 PM

Shamus · Forum Moderator & Expert

Cheshire wrote:
Thanks Shaun

No probs Joanne, I hope that it helps :D

I think that my step (2) may confuse some readers as I'm crediting and debiting the same amount to the same bucket. Problem is that whilst it looks silly to include it the explanation doesn't work without it.

I hope that you were not working on a more complex response when I posted as I know that you were all over this one but I just felt that Alison seemed to be getting mixed up, possibly by the explanations from her client, which is why I (hopefully not rudely) interupted with a more basic nuts and bolts level answer that will fingers crossed help to give her some foundations to understand your more business focused assistance.

My work here is done so I'll just disappear back into the shadows again.

Cheshire · Master Book-keeper

Shamus wrote:
Cheshire wrote:
Thanks Shaun
No probs Joanne, I hope that it helps :D

I think that my step (2) may confuse some readers as I'm crediting and debiting the same amount to the same bucket. Problem is that whilst it looks silly to include it the explanation doesn't work without it.

I hope that you were not working on a more complex response when I posted as I know that you were all over this one but I just felt that Alison seemed to be getting mixed up, possibly by the explanations from her client, which is why I (hopefully not rudely) interupted with a more basic nuts and bolts level answer that will fingers crossed help to give her some foundations to understand your more business focused assistance.

__________________________________________________________________________________________________________________________________________________________________________________________________
It wouldve been complex, took me ages to type out, hence why the more I think about it the better it is with journals, but the debit/credit VAT wouldve featured. I think its better to do it that way so you know you have covered everything as this could get very messy for Alison if she doesnt take a lot of care with each transaction.
I know now that I should prepare my technical responses on word and then copy and dump them to BKN in future, although whats the betting I will forget next time and do the same again. Still annoyed at having lost all that info and wasted all that effort.

edited for typo!

-- Edited by Cheshire on Sunday 29th of May 2016 04:02:31 PM

abacus12345 · Guru

Sorry for the hijack - I'm learning sage....in relation to the OP - could I provide a POA for Mr Smith, the payment would show as deferred income. In turn create a customer invoice - go into Mr Smiths a/c settle that invoice. If there is £1000 which is due back to Mr Smith is it a credit note or a straight payment from the bank? For simplicity I'm ignoring VAT here. Thanks

Cheshire · Master Book-keeper

Hi Johnny
The payment on account won't show in the liabs section, which is why you need to do via journals or jiggers pokey (sage technical speak)

What sage are you using?

VinceH · Expert

If all sales are done the same way - payment up front, gradually eaten into - then there will never be any sales ledger accounts that are anything other than liability or zero, so the trade debtors nominal code could be added to liabilities in the chart of accounts in Sage. Problem solved.

If, however, there are any 'normal' sales ledger accounts, then it is indeed jiggery pokery - the simplest being fun with journals.

abacus12345 · Guru

Hey. I've been having a play with 'instants' which I *believe* is similar to sage 50. I *thought* this would be akin to a poor payer - await a POA before issuing a invoice and goods. Then clear the invoice against the POA which is already in the system.

Cheshire · Master Book-keeper

Yes Vince you could have it as a floating account, although not sure if they have that in Kashflow, let's see what Alison advises.

Cheshire · Master Book-keeper

Hi Johnny. With poor payers you should issue a proforma invoice, which should be converted to a Vat invoice as soon as they pay. So payment on account would be fine as it would be allocated same day to invoice. The scenario Alison posts is completely different and should be reflected in the accounts to show the liability.

Sage instant is akin to 50, but you can do so much more on 50, especially the pro version. But it's good to practice on as mostly you get the feel for it that you need good thing when you get on 50 is that you have access to a practice and demo module, or of course ask on here!

abacus12345 · Guru

Thanks. I'm scared to spend £££ on expensive software with the cloud scenario - whether it will, or won't take off.. With paper and pen, it's a piece of cake - you know what you want to do. Sage with prepayments is another- eg rent, Dr Rent 12000 Cr bank - journal Dr prepayment Cr Rent 12000- then each month - Cr prepayment 1000 Dr Rent. Ignoring recurrings is that correct? Seems a long way around.

VinceH · Expert

Joanne: No, I didn't mean a floating account - the only point making it floating is if it the overall balance
could go either way, and I suggested moving it on the COA if all sales are done via payment up front,
gradually reducing. No point floating it if so.

However, the effect would indeed be the same.

And when I read the later posts (where Sage was mentioned) and made the above comment, I'd
forgotten the OP was using Kashflow. So... how configurable is that particular piece of clown-based
software, I wonder?

And WTF has caused this thread to go silly-wide? Bah. I'm bunging some forced newlines into my
post.

Johnny: While those postings are correct, it doesn't have to be that long-winded. I'm more inclined
to make the initial debit to prepayments rather than the P&L code: so to use your example:

Debit £12000 to prepayments, and credit bank - then each month the reversal is £1000 debited to
rent and £1000 credited to prepayments (using recurring transactions). Or of course if you're using
Sage 50 - whichever version supports it - there's a module to handle this stuff as part of the month
end routine.

Cheshire · Master Book-keeper

No idea about the wide bit, plus the box I'm typing in is teeny weeny on my ipad, can't see it (even less than usual!!!).

Johnny, I agree with Vince, just key the invoice or payment direct to the prepayments nominal. Then journals to allocate, can't do recurring, reversal or deletions of journals unless in later versions.

abacus12345 · Guru

Ok - thank you :)

alpal1971 · Member

Thank you so much Seamus and Joanne for taking the time over such comprehensive replies. Apologies for taking so long to come back - I've been away for half term.
Am going to read over your responses now and get my brain back into gear

alpal1971 · Member

Hi Vince - no, in Kashflow, you just define it as 'asset/liability' and the system decides where to put it in the balance sheet based on the balance being positive or negative

-- Edited by alpal1971 on Saturday 4th of June 2016 02:35:34 PM

alpal1971 · Member

Thank you so much to everyone that replied. It now makes total sense to me. It's just finding a system that can cope with this. Kashflow have spoken with me at length (have been very impressed by them attempting to understand my dilemma) and have admitted that their system just can't cope. So, it's spreadsheets all the way.

I can't tell you how much I appreciate your help.

Cheshire · Master Book-keeper

I used to run spreadsheet alongside Sage. Perhaps I didnt need to - no idea, just found it easier to do so,was a nice check for that 'deposits' balance every month and if it was a bit out, was easier to locate due to the spreadsheet.

Glad to help.