Invoiced and paying in different financial year

[.Adam.]

My wife is self employed, and wants to buy a piece of equipment that might have a long lead time. She would like it to show on this financial years records.
If it is ordered this financial year with a deposit, but the item is then supplied in the next financial year, with the balance paid then, what years records would it show up on, 20-21, or 21-22?

[Mr Pointy]

You could get the supplier to issue a pro-forma invoice so she pays for the item in advance. It leaves you exposed in case of non-delivery so consider paying with a credit card.

[.Adam.]

Thanks for the reply, that's an option. I know when she invoices a client then the invoice date is the important bit for tax, rather than when she gets paid but didn't know if it's the same the other way round.

[Mr Pointy]

Which accounting method has she chosen: Traditional or Cash Basis?

https://www.gov.uk/self-employed-records
https://www.gov.uk/simpler-income-tax-cash-basis

I always ran with cash basis as it was simpler for me.

[Eric Mc]

"Traditional" or "Cash" basis are purely tax return options.

In genuine, double entry book-keeping, the correct way to account for an item is to book it into the accounting period in which the financial commitment to purchase the item is made. That actual date is can be triggered by a number of events - but the most common of these is the issuing of an actual invoice for the purchase of the item by the supplier.

As mentioned above, a "pro-forma" invoice issued by the supplier will also work PROVIDED that the pro-forma invoice also commits the buyer to paying the amount shown on the pro-forma.

You mention that this is an item of equipment. Unless it is a low value item, equipment is not generally charged as a cost to the profit and loss account. It is added to the balance sheet as a Fixed Asset addition. In the accounts, depreciation on the fixed asset is charged to the profit and loss account.

In the tax computations, Capital Allowances are claimed on the asset based on the rules that pertain for that class of asset as set out by HMRC.

[2 sMoKiN bArReLs]

Eric Mc said:

As mentioned above, a "pro-forma" invoice issued by the supplier will also work PROVIDED that the pro-forma invoice also commits the buyer to paying the amount shown on the pro-forma.

Isn't pro forma the worst of both worlds? It just a document asking for cash. The payee cannot claim input vat (if there is any) & yet the invoicing party has to pay it over to HMRC.

One wouldn't normally make the commercial entries in the buyer's ledger other than show it to be an advance deposit? The actual debit asset credit creditors entry would only be made on receipt of the commercial invoice?

(I spent ten years as a truck dealer where advance supply of commercial invoices was a thorny subject....it nearly provided me with an extended stay at Her Majesty's pleasure )

Edited by 2 sMoKiN bArReLs on Wednesday 13th January 16:26

[Eric Mc]

Pro-formas are generally created to delay the requirement to pay VAT. They've always existed but they are chiefly used as a VAT deferment tool these days.

[2 sMoKiN bArReLs]

Eric Mc said:

Pro-formas are generally created to delay the requirement to pay VAT. They've always existed but they are chiefly used as a VAT deferment tool these days.

But, the issuing company still needs to pay over VAT? The tax point is the earlier of raising the commercial invoice or receipt of the cash. (I have also fallen foul of this in the past )

[.Adam.]

This is relating to a small business, no employees, not many outgoings. Normally when doing the self assessment, any expenses are just taken straight from the total earnings, should purchases of greater value (£2000 maximum) be treated differently?

[Jockman]

Prepayments and accruals?

[Eric Mc]

2 sMoKiN bArReLs said:

But, the issuing company still needs to pay over VAT? The tax point is the earlier of raising the commercial invoice or receipt of the cash. (I have also fallen foul of this in the past )

The Tax Point Date is the key to knowing when VAT needs to declared to HMRC i.e. into which VAT return the transaction needs to be placed. Tax Point Date is the EARLIER of -

i) the issuing of a full invoice
ii) the receipt of payment

A Pro-Forma invoice is not a Full Invoice so it will not trigger the requirement to include the transaction in the VAT return. That will wait until the full invoice is issued or the money is actually received - whichever occurs first.

[Eric Mc]

.Adam. said:

This is relating to a small business, no employees, not many outgoings. Normally when doing the self assessment, any expenses are just taken straight from the total earnings, should purchases of greater value (£2000 maximum) be treated differently?

You are effectively recording your income and expenditure using HMRC protocols rather than following actual accounting standards. HMRC allows small business to use simplified accounting methods.

HMRC has different rules for Income Tax reporting and VAT reporting- so you need to know which HMRC organisation's rules you wish to follow.

[.Adam.]

It's no where near the point of being VAT registered, so we are happy to keep it as simple as possible! Thanks for the advice.

[Eric Mc]

That's perfectly fine.

The problems come if and when the business grows and you will probably need to switch from the simple techniques you are using now to more recognised correct accounting methods.

[2 sMoKiN bArReLs]

Eric Mc said:

2 sMoKiN bArReLs said:

But, the issuing company still needs to pay over VAT? The tax point is the earlier of raising the commercial invoice or receipt of the cash. (I have also fallen foul of this in the past )

The Tax Point Date is the key to knowing when VAT needs to declared to HMRC i.e. into which VAT return the transaction needs to be placed. Tax Point Date is the EARLIER of -

i) the issuing of a full invoice
ii) the receipt of payment

A Pro-Forma invoice is not a Full Invoice so it will not trigger the requirement to include the transaction in the VAT return. That will wait until the full invoice is issued or the money is actually received - whichever occurs first.

Exactly, that was what I was saying.

[2 sMoKiN bArReLs]

So, if a pro forma invoice is paid (between VAT registered companies) the seller needs to pay over the VAT, but the buyer cannot reclaim this VAT until the commercial VAT invoice is received.

[Eric Mc]

2 sMoKiN bArReLs said:

So, if a pro forma invoice is paid (between VAT registered companies) the seller needs to pay over the VAT, but the buyer cannot reclaim this VAT until the commercial VAT invoice is received.

The seller DOES NOT pay over the VAT on the basis of having just issued a pro-forma invoice. In fact, the issuing of pro-forma invoices as a subterfuge to DELAY paying over the VAT. The VAT only becomes due and payable to HMRC when either -

cash is received from the customer
or
they issue a PROPER sales invoice

whichever happens the earliest.

The business acquiring the goods or service should never attempt to recover any Input VAT using a "pro-forma" invoice.

Most pro-forma" invoices will state quite clearly "This is NOT a VAT Invoice". That is the alert to the recipient that they should not use this document to try to recover the Input VAT.
They should only reclaim the Input VAT when they receive the PROPER invoice from the supplier.

[2 sMoKiN bArReLs]

Eric Mc said:

2 sMoKiN bArReLs said:

So, if a pro forma invoice is paid (between VAT registered companies) the seller needs to pay over the VAT, but the buyer cannot reclaim this VAT until the commercial VAT invoice is received.

The seller DOES NOT pay over the VAT on the basis of having just issued a pro-forma invoice. In fact, the issuing of pro-forma invoices as a subterfuge to DELAY paying over the VAT. The VAT only becomes due and payable to HMRC when either -

cash is received from the customer
or
they issue a PROPER sales invoice

whichever happens the earliest.

The business acquiring the goods or service should never attempt to recover any Input VAT using a "pro-forma" invoice.

Most pro-forma" invoices will state quite clearly "This is NOT a VAT Invoice". That is the alert to the recipient that they should not use this document to try to recover the Input VAT.
They should only reclaim the Input VAT when they receive the PROPER invoice from the supplier.

That's what I said. When the invoice is PAID

[2 sMoKiN bArReLs]

Example

Seller issues a pro forma invoice 14th January, customer pays it.

Goods are supplied 30th June, along with commercial invoice.

The seller needs to pay over the VAT in which ever return includes 14th January, the buyer cannot offset the VAT until which ever return includes 30th June.

(Assuming the pro forma invoice is for goods + vat and is an early snap shot of the commercial invoice)

[Eric Mc]

2 sMoKiN bArReLs said:

That's what I said. When the invoice is PAID

Correct then. There is a timing mismatch.