Invoicing before work is carried out?

[zcacogp]

Chaps,

Here's one that must have been done before. I have a customer (private individual) who wants some work done, but wants to pay for it before the 5th April so it fits in this tax year rather than next. The work will mostly take place after this date.

I'm a business, so the April tax year cut-off makes no difference to me, but is there anything wrong with invoicing before the work has been carried out, for these reasons? If we are to go ahead with this plan, is there anything to look out for? Are there extra problems if it is invoiced before the 5th April but payment is made after the 5th April?


Oli.

[Eric Mc]

Why can't he just accrue for the cost?

There is an allowable accounting technique whereby an expected expense for a particular accounting period can be shown as a cost for that accounting period even though the supplier has not yet issued an invoice.

Conversely, if an expense is billed in advance of the work being done and the work is properly belonging to a later accounting period, then, even if the invoice is issued early, the proper accounting treatment would be to defer that part of the cost that relates to the later accounting period as a "Prepaid Expense" and "park" it in the Balance Sheet rather than show it as a cost in the earlier accounting period.

All of these techniques are attempts by accountants to ensure that Income is properly matched against relevant expenditure and that timing and cut off differences do not unduly distort the accounts.

[T1pper]

I do not see a problem lots of non account holders have to pay up front before work is started or goods are released.

Assuming the customer does not have an account you could produce an invoice now it is your discression if you want to complete the work/release goods before being paid.

However you will have to account for this in your books showing an outstanding invoice.

Just my opinion dont know if it is acceptable someone will put me right I am sure!

[zcacogp]

Chaps,

Thanks for the advice.

Eric: What do you mean by "Accrue for the cost"? (To confirm, this is a private individual trying to get an expense into this tax year rather than the next in order to lower his income tax level).

T1pper - thanks.


Oli.

[Eric Mc]

The business can show that part of the cost relating to the accounting period in the profit and loss account even if an invoice has not yet been given to him by his supplier.

It is very common practice in business and is completely OK, provided that the provision for the unbilled expense is realistic and reflects the true level of the expected cost.

[zcacogp]

Eric,

Thanks, but the purchaser in this instance is a private individual, and the work being done is a (small) refurbishment of a house which I will be taking on to let for him. There is no business and he wants the expense in this tax year (not next year) as he wants to set it against income tax.


Oli.

[Mr Overheads]

zcacogp said:

To confirm, this is a private individual trying to get an expense into this tax year rather than the next in order to lower his income tax level

Presumably if he's offsetting expenses agaisnt income for tax, then he's not a private individual, he's a sole trader. i.e. he's running a non-incorporated business? In which case Eric is spot on (as usual).

[zcacogp]

Mr Overheads said:

zcacogp said:

To confirm, this is a private individual trying to get an expense into this tax year rather than the next in order to lower his income tax level

Presumably if he's offsetting expenses agaisnt income for tax, then he's not a private individual, he's a sole trader. i.e. he's running a non-incorporated business? In which case Eric is spot on (as usual).

Penny has just dropped.

Apologies for being fick. Yes, Eric is on the money (in so many ways!)

Thanks. And thanks for the answers.


Oli.

[Eric Mc]

zcacogp said:

Eric,

Thanks, but the purchaser in this instance is a private individual, and the work being done is a (small) refurbishment of a house which I will be taking on to let for him. There is no business and he wants the expense in this tax year (not next year) as he wants to set it against income tax.


Oli.

If he is not running a business, why does he think he will get tax relief for this type of expense?

What type of income does he intend to offset the cost against in order to claim tax relief?

[Lurking Lawyer]

Those are surely all points for the purchaser though, not the OP? It's nothing to do with him whether the purchaser is going to run into strife with the lovely people at the Revenue.....

[Eric Mc]

But the person raising the invoice should be aware of the accounting and tax issues in his own business if he raises an invoice before its normal invoice date.

[Lurking Lawyer]

Eric Mc said:

But the person raising the invoice should be aware of the accounting and tax issues in his own business if he raises an invoice before its normal invoice date.

Fair point. I had understood from what the OP said that it was tax-neutral to him, but I take your point.

The rather simplistic (and from a purely legal point of view) that I looked at it was that if the money had been paid up front after being invoiced but before the work was actually done, it didn't really pose a problem to the OP.

Admittedly, as a litigation lawyer, my usual concern is simply worrying about how the client is going to get paid

[Eric Mc]

It's applying the "matching" concept that causes headaches for accountants.

"Matching" is a fundamental concept in accounting and,. as such, HMRC expects that concept to be applied to any set of accounts. If they feel that the concept has been ignored in order to create an incorrect tax advantage to a business, then they will not be impressed.

The introduction of "Cash Accounting" for small sole traders more or less blows all accounting concepts out of the water - which is going to cause massive problems for both accountants and HMRC as there will be very real likelihood of incorrect accounting, double accounting and lots of other issues.

[paulrockliffe]

The issue of an invoice before the work is done won't create a tax point, so you shouldn't be accounting for any VAT before you do the work, unless you are using a cash accounting scheme.

[Eric Mc]

For "normal" traders, VAT Tax Point is the earlier of -

The issue of a VAT invoice
The receipt of the cash

[2 sMoKiN bArReLs]

Common place in the capital goods industry.

(I did, however, end up in jail for it)

[RYH64E]

Eric Mc said:

For "normal" traders, VAT Tax Point is the earlier of -

The issue of a VAT invoice
The receipt of the cash

What if you're on the cash accounting scheme?

[Simpo Two]

I don't see any need for a debate.



'Can you invoice me now please, before the work is done?'

'Yes, here you are'.

'Thanks, here is your money'.



How each party accounts for it is up to them.

[2 sMoKiN bArReLs]

Simpo Two said:

'Thanks, here is your money'.



How each party accounts for it is up to them.

Except this is not usually the end game. Can I have the invoice for VAT/Tax/year end (delete as appropriate)

...and payment might follow some time hence

[LooneyTunes]

There's a commercial point to consider: are you absolutely certain that the final cost will balance with the sum you're being asked to invoice now?

If not, make sure things are worded in such a way to allow you to cover any shortfall.