Year end VAT liability - Cash receipts basis

HcksawJimDuggan

This may seem like a simple question to some but I can't quite get my head around it.

If a company returns its VAT on a cash receipts basis and has a financial year end of 31 December, should the VAT liability in it's accounts be:

1 - it's November/December VAT liability

or

2- it's November/December VAT liability + VAT due on debtors

Common sense tells me that it should be 1 but if I am to go by the figures produced by a trial balance it is option 2 (unless an adjustment is made for the VAT on debtors)

Any suggestions would be greatly appreciated.

Alan Shore

There seems to be two trains of though on this as you have outlined.

I'm of the view that if you raise a sales invoice and charge VAT you owe that VAT to the CG. The fact that you account for VAT on a cash receipts basis means it's not yet due.

So in principal it's a liability and for accounting purposes should be disclosed as such. The issue arises that the VAT control account does not agree to the last VAT3 and so people put the VAT due on Debtors in to a Credit nominal with debtors. I don't think that it is correct from an accounting viewpoint!

prettyrestless

Option 1. If VAT is accounted for on a cash receipts basis then debtors should be included in your accounts net of VAT.

Alan Shore wrote: »

The issue arises that the VAT control account does not agree to the last VAT3 and so people put the VAT due on Debtors in to a Credit nominal with debtors. I don't think that it is correct from an accounting viewpoint!

Disagreeing with you slightly here! When preparing accounts for an entity that returns VAT on a cash receipts basis the VAT on sales figure in the VAT control account should be VAT on cash received. It should not be VAT on sales invoices.

If the funds have not been received, the VAT does not relate to this period and is not due and should not be included in the VAT control account regardless of whether you have issued an invoice or not.

Alan Shore

We will have to agree to disagree on what the VAT on sales figure is.

But are you suggesting that the balance on the debtors control account is not in fact the total owed by Debtors (my view) but instead the amount owed by Debtors less the VAT that you charged them?

Valetta

My view would be that the VAT element of the Debtors Control Account should be extracted and held in Current Assets as a credit balance.

The net current assets will be correct, and you are not showing the VAT as a liability.

prettyrestless

Alan Shore wrote: »

We will have to agree to disagree on what the VAT on sales figure is.

But are you suggesting that the balance on the debtors control account is not in fact the total owed by Debtors (my view) but instead the amount owed by Debtors less the VAT that you charged them?

Essentially yes. All amounts in the accounts should be shown net of VAT. The VAT is technically not due to you, you are collecting it on behalf of the CG.

HcksawJimDuggan

Cheers for all the responses.

Strong cases for both sides of the argument so still unsure as to what the correct treatment is.

prettyrestless

It's option 1. If the money hasn't been received then VAT ain't due. If your TB isn't balancing then maybe your VAT per control account isn't right.

HcksawJimDuggan

prettyrestless wrote: »

It's option 1. If the money hasn't been received then VAT ain't due. If your TB isn't balancing then maybe your VAT per control account isn't right.

The TB is balancing but the VAT control a/c includes VAT on debtors (even though I have selected the Cash receipts basis VAT module in Sage Line 50). In order to correct it I will need to calculate the VAT on debtors and manually post a journal debiting the VAT control a/c and crediting a current asset a/c for VAT due on debtors to be collected on behalf of CG. Is this what you are suggesting?

Valetta

HcksawJimDuggan wrote: »

The TB is balancing but the VAT control a/c includes VAT on debtors (even though I have selected the Cash receipts basis VAT module in Sage Line 50). In order to correct it I will need to calculate the VAT on debtors and manually post a journal debiting the VAT control a/c and crediting a current asset a/c for VAT due on debtors to be collected on behalf of CG. Is this what you are suggesting?

that's what I would do.

If your system allows reversing journals, then I would debit the VAT Control A/C and credit the Debtors Control Account with the VAT element.

This way you are correctly stating your debtors figure on the balance sheet.

HcksawJimDuggan

Valetta wrote: »

that's what I would do.

If your system allows reversing journals, then I would debit the VAT Control A/C and credit the Debtors Control Account with the VAT element.

This way you are correctly stating your debtors figure on the balance sheet.

But once the debtor pay's the invoice you'd have to reverse the transaction again as otherwise there would be an overpayment on the debtor a/c. I think it simplifies the situation by just doing a year end journal and reversing it at the start of the following year.

prettyrestless

HcksawJimDuggan wrote: »

But once the debtor pay's the invoice you'd have to reverse the transaction again as otherwise there would be an overpayment on the debtor a/c. I think it simplifies the situation by just doing a year end journal and reversing it at the start of the following year.

You will have to reverse the transaction once the debtors pay but this will be after the year end so that's ok. The most important thing is that at your balance sheet date all liabilities and assets are recorded correctly and posting the adjustment that Valetta has suggested is the only way around your situation.

Martin567

prettyrestless wrote: »

You will have to reverse the transaction once the debtors pay but this will be after the year end so that's ok. The most important thing is that at your balance sheet date all liabilities and assets are recorded correctly and posting the adjustment that Valetta has suggested is the only way around your situation.

I would be more in agreement with Alan Shore above that none of this is really necessary. However, assuming that a Dr Vat, Cr Debtors adjustment is to be made then there should certainly be no need to complicate matters too much.

A simple double entry adjustment as above done at the year-end date should be reversed on the first day of the new year and that should be it. The Trade Debtors at year-end will then comprise the total per the Aged Debtors listing (all VAT inclusive) less a one line adjustment for VAT on these Debtors. The VAT balance will presumably just be the last period's VAT return.

I may be misunderstanding what you're saying above but talk of reversing adjustments "once the debtors pay" has the potential to be very confusing. The Debtors listing could be very long and they certainly won't all pay at the same time. I can imagine things getting very complicated with partial adjustments, etc, and it could get very messy, very quickly!

Immy

I also agree with Alan Shore and would leave the liabity on the balance sheet at the year end.

dbran

I would agree with Alan Shore and that it is Option 2.

When you make the sale, you are owed the money from the debtors(inclusive of VAT) for that sale at the balance sheet date.

You also owe the VAT to the revenue because you have made the sale. It is a liability that exists at the balance sheet date. The fact that you are on the cash accounting basis is not relevant. That just determines when the VAT liability is actually paid ie you dont have to pay the VAT until the debtor pays. But that does not mean that the VAT is not owed.

You could of course eliminate the VAT on the debtors from the balance sheet as you suggest. But I believe in certain circumstances it would be misleading because you are understating the amount that is owed by the debtors at the balance sheet date and at the same time understating the VAT liabilities owed to revenue at the balance sheet date. Both of these figures could be of particular interest to the reader of the accounts.

It would also add an additional layer of unnecessary complexity whilst taking away a valuable method to test that the accounts are correct. The vat liability should actually tie into the vat on the debtors plus the vat owing on the unpaid VAT returns. If they do not then there may be something wrong with your accounts. If you were to adopt your option 1, then the temptation would be to simply "make" the VAT return agree to the accounts and write off the difference to debtors. There would be no way or reason (or incentive) to check whether or not your accounts and VAT control is right.

That would be my take on it anyway.

dbran

barneystinson

To those advocating option 1, can you explain how one can recognise the income from the sale, without recognising the VAT on the sale as being both due from the debtor and a liability to Revenue?

Valetta

barneystinson wrote: »

To those advocating option 1, can you explain how one can recognise the income from the sale, without recognising the VAT on the sale as being both due from the debtor and a liability to Revenue?

In my mind, you recognise the sale, as goods or services have been supplied in the period.

As the VAT is returned on a cash receipts basis, the VAT liability does not arise until the cash is received.

If the VAT was being accounted for on an invoiced basis, then the liability arises as soon as the invoice is raised.

I would say it's one of those that there is no 100% correct answer. However, I do think there should be a different treatment of the VAT for the two methods of accounting.

thomlin

Invoice or cash basis is only the method of what has to be paid and when not the liability owed.

If I raise an invoice for €123.00 incl VAT then I owe the CG €23 the only way this liability will reduce is if I issue a credit note or a bad debt W/O (that's another discussion topic)

Same logic applies to customer discount if I agreed to give a €5 discount if you pay early or at least on time then I get €95 but the CG still gets €23 hence my liability is still €23.

Regardless if you are on a cash basis if you journal out the VAT liability then you are understating both your debtors and liabilities at the year end.

At best you could journal it into a deferred creditor nominal but to be honest you're creating unnecessary work because your liability is still the same you're really just window dressing IMO.

Hope this helps :-)

Tom