New to the forum so I hope this question hasn't been asked to many times before.
I need a little clarification as my CEO has been told one thing by his old accountant that I don't think is correct.
The situation is he has been told that because we factor our invoices and we use the cash account VAT we don't have to record the VAT until the customer pays the invoice in full to the factoring company and we receive the advance.
My understanding is that because we receive 80% of the advance up front we should record 80% of the VAT in the month received with the remaining 15% recorded once that payment has been received?
Could someone please confirm what is the correct procedure?
Hi Clive So hows about an intro before we start. We always ask newbies!
Usual stuff - what prof body do you belong to, do you work for yourself or in a practice/ firm or just for this one company, are you a bookkeeper or accountant, what qualifications, how long in role, where up to in your studies-what exams passed/with what body/in midst of doing, where based, what you did before this role? That sort of thing. Helps get to know you but also how best to pitch answers.
Or QE?
Recourse or non recourse factoring or invoice discounting?
Both of you are wrong.
Be good to have that update and then I can explain further.
-- Edited by Cheshire on Tuesday 7th of August 2018 10:23:17 AM
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Well Iām working for one company as a finance manager, Iām a member of the ICB and have studied with the AAT. Recently moved into this role from a credit controller role
Thank you for the welcome!
Itās invoice discounting and our terms are 14 days date of invoice.
Thereās a standard Ā£15 listing fee and a variable buying fee.
Ok - so i/v disc is just a way of financing the debt, bit like a loan, with the debtor book as security. So they loan you 85% of the debtor book to start and the balance when your debtor pays them. So treat the i/v finance facility as an overdrawn bank account (loan - current liability) in your software. That way you can process the advances/final 15% as mere transfers to the main current account.
Plus you will then clear the debtor receipts you get via this dummy account and process the charges through it per the reports you get.
The tax point remains the date the client pays the i/v finance house.
So you process the advance and balance payments as VAT neutral. But you pay the VAT the date the actual payment hits THEM from your client - so key the receipts via that dummy i/v discounting bank in your software direct to the debtor book. The dummy account can be reconciled to the i/v disc reports and the debtor book will balance to both your customers and the i/v discounting house.
Works a treat, albeit an expensive form of finance, but you need to make sure you get ALL the appropriate reports.
The way you have suggested would result in a huge VAT bill on inception of the facility, which would defeat the object of VAT cash accounting.
Although - I do wonder the benefits of i/v discounting if you giving 14 day terms. Plus also why you would need to be on VAT cash accounting scheme. Both are generally available for slow paying/longer term invoices to bridge that finance gap.
__________________
Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Thanks for the advise.
I must Iām not sure why the company is on cash VAT but this was set up by the previous accountant and as Iāve only been there 3 weeks Iām still getting my bearings!!
As far as recording invoices go the processed used is raise the invoice in the normal way, send the invoice to the I/d company, when the initial advance (85%) hits our bank this is credited to the debtors account. When the final 15% (less fees) arrives this is credited to the debtors account with the outstanding balance equalling the fees this is cleared of to the factoring costs.
when the initial advance (85%) hits our bank this is credited to the debtors account. When the final 15% (less fees) arrives this is credited to the debtors account with the outstanding balance equalling the fees this is cleared of to the factoring costs.
noooooooooooo.
The 85% is NOT a payment of debtors.
What happens in the event of disputed debt?
This is false reporting in your accounts surely?
-- Edited by Cheshire on Tuesday 7th of August 2018 03:10:27 PM
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
As Joanne says, that 85% advance is basically a loan against the invoice debt - it is NOT a settlement of the debt.
Joanne's explanation does tell you everything you need, but if you want a step by step guide as to how to handle it, try this - an ancient post of mine that does just that.
It may be over simplified (especially given that you were asking about the VAT handling) because I didn't go into any explanations of the whys and wherefores - but if you follow the steps (first half) the VAT should be dealt with correctly; it shows the 'debt' being paid by the end customer when they pay the factoring company, which is what Joanne said above, so if your software is set up for cash accounting, it'll show the VAT becoming due based on that.
You also commented that you aren't sure why the company is on cash accounting - but the most likely answer is the same reason they are using a factoring company: cash flow. It can be beneficial to defer paying VAT due until it's actually in the bank. That said, with short payment terms (and, I presume, most creditors being on 30 day terms) it may be a false economy. However, you're in a position to know more about the ins and outs of that than any of us.
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Vince M Hudd - Soft Rock Software
(I only came here looking for fellow apiarists...)
I suspect the previous VAT returns have been completed incorrectly. But I guess that does depend on what software has been used and how easily they can interact with it to get the cash accounting processing done properly, albeit if the CEO was directing things its almost a given that its not right.
How long has the facility been in play Clive?
Just wondering what kind of re-work/re-key would be required.
Edited to correct a spelling
-- Edited by Cheshire on Tuesday 7th of August 2018 04:34:36 PM
__________________
Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Just to add another warning - factoring and i/v discounting are different. Plus length of term of invoices matters for VAT cash accounting - rules would be different from that described here for VAT calc
__________________
Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
