I’d be grateful for advice on how to handle the posting of the following scenario:
We’ve recently concluded a contract with a customer which has a contingent element dealing with costs which might arise in future. The client has paid us a provisional payment against an agreement that at the end of their financial year (which is December 2024) there will be a balancing charge either in our favour if the costs exceed the current agreed limit or in theirs (a refund) if costs are less than agreed.
I need to understand how I should handle the receipt of the provisional payment as if I just post it as income in this year without the underlying arising costs then we’d be subject to corporation tax on the whole amount whereas there may actually be no profit when it comes to December.
How do I post a transaction which takes into account these future costs in order to offset the receipt?
Any assistance would be most welcome
Hello @davidmonks
There is not a way to post a payment which takes into account costs which may or may not arise.
I would recommend speaking to your accountant for tailored, professional advice on this as they would be able to guide you better.
The way you describe it sounds like a normal “prepayment” or payment on account - they’ve paid you some money now that will be used to settle invoices you raise in the future. So you would tag it as payment from a customer, then “pay down multiple invoices or assign to client account” to hold the funds as a prepayment on their account.
As the agreed costs arise you would create invoices to re-charge these costs to the client, and use the “log payment → apply from credit” option to mark those invoices as paid using the funds held on account. If the funds on account run out then subsequent invoices would be left unpaid (or part paid) until they make the balancing payment at year end. If there’s funds still left at the year end then you would “refund balance” on the original payment to return the surplus funds to them.
The prepayment just sits as part of the debtors control account on your balance sheet, it only converts into P&L income at the point when you raise the re-charging invoice(s).
Ian,
Many thanks for such a clear response to my question.
I now know exactly how to proceed.
David
If you are VAT registered you may wish to checkout gov.uk.
VAT has to be accounted for on Advance Payments and Deposits
Advance payments and deposits
An advance payment, or deposit, is a proportion of the total selling price that a customer pays before you supply them with goods or services.
The tax point will be either the date you issue a VAT invoice for the advance payment, or the date you receive the advance payment, whichever happens first.
You include the VAT due on the advance payment on your VAT Return for the period when the tax point occurs.
If the customer pays you the remaining balance before the goods are delivered or the services are performed, a further tax point is created. This will be either when you issue a VAT invoice for the balance, or when you receive payment of the balance, whichever happens first.
You then include the VAT due on the balance on the return for when the further tax point occurs.
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