Customer Paying in Advance - When Do We Declaire to HMRC?

oompahloompah

Hi everyone
I'm starting the process of closing the books off for financial year 2012/13, but have a query (just the one at the moment, might be back with more :rotfl:)
We are planning a large scale project for a customer which will take place later this year. Our financial year runs 1st April - 31st March. Up to 31st March 2013, the customer made some advance payments towards the cost of this project so they are not hit with a huge bill all at once. We have sent 4 separate invoices (all with VAT added, VAT included in the relevant VAT returns and paid accordingly), 2 of which have been paid so far. There are a further 4 invoices (totalling the same amount) due to go out to clear the cost of the project. So far we've had no outlay - neither time nor money - on this project but will have substantial outlay of both in the days leading up to the finale.
Anyway, what I am wondering is - just to make sure our tax returns are right (we don't have an accountant) - do we declare this income in the tax year just gone, or in the coming tax year as - although we have received some payment - we haven't actually done any of the work yet nor had any associated expenses, nor will we until closer to the finishing date of the project.
I've been trawling the internet all afternoon trying to find a definitive answer but I can't see anything that fits this situation completely.
Thanks everyone!
Oompah x

WHA

You need to carry it all over into the new tax year so that the income/expenses/profits all match in the year in which the work is done.

martindow

Doesn't this depend on whether you are using cash accounting or not?

http://www.hmrc.gov.uk/vat/start/schemes/cash.htm

With cash accounting VAT is dealt with when invoices are paid. I don't think you can carry this over to a new year.

Wywth

oompahloompah wrote: »

Hi everyone
I'm starting the process of closing the books off for financial year 2012/13, but have a query (just the one at the moment, might be back with more :rotfl:)
We are planning a large scale project for a customer which will take place later this year. Our financial year runs 1st April - 31st March. Up to 31st March 2013, the customer made some advance payments towards the cost of this project so they are not hit with a huge bill all at once. We have sent 4 separate invoices (all with VAT added, VAT included in the relevant VAT returns and paid accordingly), 2 of which have been paid so far. There are a further 4 invoices (totalling the same amount) due to go out to clear the cost of the project. So far we've had no outlay - neither time nor money - on this project but will have substantial outlay of both in the days leading up to the finale.
Anyway, what I am wondering is - just to make sure our tax returns are right (we don't have an accountant) - do we declare this income in the tax year just gone, or in the coming tax year as - although we have received some payment - we haven't actually done any of the work yet nor had any associated expenses, nor will we until closer to the finishing date of the project.
I've been trawling the internet all afternoon trying to find a definitive answer but I can't see anything that fits this situation completely.
Thanks everyone!
Oompah x

As you have been paid the invoices you have so far produced, surely this is income received?

As you have not yet supplied the goods or services for which you have invoiced and been paid, then I would say this goes down as a liability (i.e something you know you will have to pay for, whether it be material or labour)

Invoices not yet paid go down as debts owed to you.

Note that VAT on the invoices you have issued is due to HMRC for the period the invoice was issued in i.e the effective tax point (whether or not the customer has paid it to you) - assuming you work the traditional approach to VAT.

firstinflight

Sorry, Wywth, but you are wrong. HRMC currently requires all businesses to apply the "accruals basis" in calculating their taxable profits.

This might interest you though, as for this coming tax year, very small businesses will be permitted to calculate profits on a cash basis:

http://www.hmrc.gov.uk/budget-updates/march2013/simpler-income-tax-tech-note.pdf

Anyway, for 12/13 on an accruals basis, you only recognise the income when you've "earned" it, i.e. done the work. On the same basis, if you bought materials up front to do the work, you only recognise the expense at the point you actually use them.

So assuming you've done nothing whatsoever on this contract in the 12/13 year your accounting is as follows (if you're keeping double entry books)

Issue of invoice:
Dr Debtors
Cr Billings in advance (on balance sheet-aka deferred income)

Receipt of cash:
Dr Cash
Cr Debtors

When you do the work next year:
Dr Billings in advance
Cr Revenue (for the tax return)

oompahloompah

Thanks everyone!

I have already allowed for the VAT element of the invoices in the most recent VAT return and paid accordingly, so that's fine.

I was asking about tax (and NI) due - the money already paid is essentially a deposit but I didn't want to withhold the tax until next (financial) year if we weren't allowed to do this, but of course by the same token I don't want to have a bigger tax liability in 2012/13 that I should have - if the project is cancelled we would have to return the money paid to us so it's not actually "ours" at the moment.

Thanks again everyone (as usual you are a mine of very useful information!)

Oompah x

Wywth

oompahloompah wrote: »

Thanks everyone!

I have already allowed for the VAT element of the invoices in the most recent VAT return and paid accordingly, so that's fine.

I was asking about tax (and NI) due - the money already paid is essentially a deposit but I didn't want to withhold the tax until next (financial) year if we weren't allowed to do this, but of course by the same token I don't want to have a bigger tax liability in 2012/13 that I should have - if the project is cancelled we would have to return the money paid to us so it's not actually "ours" at the moment.

Thanks again everyone (as usual you are a mine of very useful information!)

Oompah x

You said you invoiced the amount and they paid you the amount invoiced; that means the money is yours in my book.
(All you have to do now is fulfil your side of the contract)

If you later decide you wish to return the money because of a mutual agreement to cancel the whole thing, then you will need to issue a credit note.

oompahloompah

Wywth wrote: »

You said you invoiced the amount and they paid you the amount invoiced; that means the money is yours in my book.
(All you have to do now is fulfil your side of the contract)

If you later decide you wish to return the money because of a mutual agreement to cancel the whole thing, then you will need to issue a credit note.

Yes, that's what was confusing me, I think! They have paid 2 out of 4 invoices sent (we have sent the VAT element for all 4 invoices on to HMRC already) and there are a further 4 invoices to be sent to closer to the project finale.

It helped the customer's budget to pay in instalments rather than all at once, which is why we agreed to the payment plan, but this isn't something we've done before (we usually invoice when the job is completed, which is obviously straightforward from an income point of view) so I just wanted to check the right way to account for this before submitting the tax returns. The customer isn't entirely sure what they are after so there is a chance they will be refunded in full or in part (and also explains why we've not started working on it yet!!)

Thanks again
Oompah x