One of my main clients asked me to refund an invoice they paid me in the 2019 financial year, as they discovered that the total amount they paid, on their accounting system, should have been split into different invoices. They've asked me to repay the full amount, including VAT (£1200), with a direct bank transfer, for the invoice they paid me back in 2019. Then, they advised to submit 2 new invoices, totalling the same amount as the original invoice (£360 + £840). So in this way the amount I have repaid them with be cancelled out by the amount they are going to pay me on the 2 new invoices.
How should I account in my Xero accounting software, for the refund I have sent?
Should I create a credit note using the same "sales account" so the amount repaid will be cancelled out by the 2 new invoices there will be repaid back to me later?
I was advised that on the amount I have repaid, I shouldn't use the 20% on sales VAT, as the VAT was already paid in the previous financial year (£1200 no VAT), but to apply the usual 20% VAT on sales on the 2 new invoices (£300 + £60 VAT and £700 + £140 VAT). However, if I were to do this, I would end up paying VAT again on the same invoice, as far as I can see.
In my view, as the amount I paid back £1200 was the full amount including £200 VAT, I should also use the same 20% VAT category in the credit note, which will then be cancelled out by the 20% VAT (£60+£140) I will receive back on the payment of the 2 new invoices.
Can anyone advise me, especially on the VAT issue, please?
2019 Invoice £1000.00
Total VAT 20% £ 200.00
TOTAL Repaid £1200.00
New invoices 2022:
Invoice 1 £ 300.00
Total VAT 20% £ 60.00
TOTAL £ 360.00
Invoice 2 £ 700.00
Total VAT 20% £ 140.00
TOTAL £ 840.00
Many thanks
J
-- Edited by JMWT on Monday 6th of June 2022 04:08:27 PM
In 2019 you issued 1 invoice for £1000 + VAT which should have gone on 2 invoices, one for £700 and one for £300?
To correct the error, they want you to send them back £1200 with a corresponding credit note for £1200 showing no VAT?
Point 1 By the sounds of it you've already refunded this money and just need to work out the credit note. It has to be £1000 + VAT, otherwise you'll lose out by £200, as you've already spotted. It also means they won't pay VAT on the credit note, but can reclaim the £200 on the new invoices.
Point 2 Why the hell they can't do that internally by using a dummy credit note and dummy invoices is beyond me, or at the very least, asking for the credit note plus 2 invoices, without any money changing hands.
Point 3 This doesn't sound right to me at all, and I suspect it's some type of, at best a way for the Company to improve their cash flow temporarily at your expense, or at worst, not refunding the money at all.
In answer to your question in bold, yes, use the same sales code you used previously, both for the cn and the invoices. It has no effect on your accounting, as they will cancel each other out.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
Point 2 Why the hell they can't do that internally by using a dummy credit note and dummy invoices is beyond me, or at the very least, asking for the credit note plus 2 invoices, without any money changing hands.
Are you sure this isn't a scam? How can you be sure they will pay you. A credit note and two invoices would achieve the same outcome without you waiting to be paid again. So would journals at their end. Or am I missing something?
Is there any justification that you can see from your perspective that the work that you performed was separate units of work?
You have been paid, the money has been accounted for in the correct period. The VAT has been accounted for in the correct period. The issue is purely theirs to split on their side of the fence if they need to.
Alternatively, as this is a main client and sure that you want to bend over backwards for this stupid request, then the amounts concerned can be offset against the new invoices without any money having to be repaid.
The invoices must relate to the time that the work was done so if their request relates to wanting to move the payment to a different period then thats a big red flag.
The software used is immaterial. The fundamental principle of payments being matched to the period to which they relate is all that matters.
Any invoices must relate to 2019, NOT 2022.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
We're on the same wave length. I avoided the Scam word but its the first thing that went through my mind.
The whole scenario is just wrong.
Just off to check out theat Aweb link posted by Pete (p.s. Hi Pete, welcome to the forum).
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Right, read that. They agree with us. It's bloody stupid request.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
JOHN! Sorry, when I started writing my reply there was nothing and in the blink of an eye they have four of us replying at more or less the same time. I looked up and saw Ian and Pete but didn't scroll up. Think that we're all in agreement with slight differences in emphasis and application.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
LOL, no worries Shaun, good to see some activity on the forum for a change. Having read the aweb thread, it's an accountant who gave J the advice not to include vat on the credit note, and that it's a Gov dept that's asked for this money back.
Hope it wasn't HMRC
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
In 2019 you issued 1 invoice for £1000 + VAT which should have gone on 2 invoices, one for £700 and one for £300?
To correct the error, they want you to send them back £1200 with a corresponding credit note for £1200 showing no VAT?
They actually didn't ask for a credit note, they just ask me for the refund with a direct bank transfer, followed by the 2 new invoices. They didn't mention VAT, but they asked me for the full amount hence including the VAT that they paid me in the first place.
Point 1 By the sounds of it you've already refunded this money and just need to work out the credit note. It has to be £1000 + VAT, otherwise you'll lose out by £200, as you've already spotted. It also means they won't pay VAT on the credit note, but can reclaim the £200 on the new invoices.
I have already repaid it. The credit note was just to balance my Sales account in Xero.
Point 2 Why the hell they can't do that internally by using a dummy credit note and dummy invoices is beyond me, or at the very least, asking for the credit note plus 2 invoices, without any money changing hands.
Goverment body.....
Point 3 This doesn't sound right to me at all, and I suspect it's some type of, at best a way for the Company to improve their cash flow temporarily at your expense, or at worst, not refunding the money at all.
Defintaly not the case
In answer to your question in bold, yes, use the same sales code you used previously, both for the cn and the invoices. It has no effect on your accounting, as they will cancel each other out.
Thank you so much, that is exaclty what I have thoguh, but I was not sure it is was right.
Now that it is clear that I have to assign for the 20% VAT to the transfer I send back to them, and considering that they didn't ask for a credit note, shall I still have to create a credit note in Xero or just reconcile the transaction against Sales with 20% VAT on Income?
I hope I have replied correctly, using the quote and the bold.
Now that it is clear that I have to assign for the 20% VAT to the transfer I send back to them, and considering that they didn't ask for a credit note, shall I still have to create a credit note in Xero or just reconcile the transaction against Sales with 20% VAT on Income?
Yes, still do the credit note, and match that with the payment you made back to the Gov dept.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
Really puzzled by what this Gov't department is doing. They were funded by Consolidated Fund for their original invoice payment to you. Consequently, they must return the money you've now paid them back to Consolidated Fund as a CFER (Consolidated Fund Extra Receipt). They don't get to keep the money to pay you with for a second time. In effect, now they have to go back to Consolidated Fund to get the money with which to pay you a second time. They've created an unnecessary pressure for themselves in the current year. Bonkers!
