Hello!
We have a client who makes products for us and charges us for those products.
They then sell them on our behalf and also charges us a fee.
They then send us a statement and holds back some money (retention) just in case the product doesn’t sell.
How can we account for this?
At this stage there is no actual cash being exchanged its all in a contra holding bank account?
How does this affect my VAT return? I understand that the retentions is not VATable as the amount that the client pays us, the cash impacts, do not affect the VAT, hence why the retention does not attract VAT it is just a cash adjustment.
I would be grateful of you advice.
Many Thanks
I take you are not on cash basis for VAT?
What happens if products are not sold, whose take the risk of cost you or your producer? Its crucial to determine not only the amount that should be booked but also the timing of sale and stock
Overall this can be dealt with same way as CIS with holding a/c
We are actually on cash accounting for VAT.
We take the risk.
Can you let me know what the way for CIS is?
Thanks for your help.
Right you need to account for vat when you receive cash and make payments for your expenses and ignore invoice dates as vat is not on accrual basis
Best is to create your producer as your supplier and customer too, record purchases and sales as and when they happen and mark them paid through bank as normal. Use contra holding bank account for any proceed retained by your producer until you receive actual cash which would result in entry from contra holding bank account to main bank. Fact that money is sitting with your producer it should be subject to vat because they are proceeds from your sales. You can use same contra holding bank account to record contra entries to off set sales and procurement funds
Thanks,
So just going back over what you have written. If I mark them as paid through the bank as normal this will affect the bank balance and it won’t marry.
Originally I was creating a contra account and was recording the sales and purchases to that account (having created the producer as a supplier and customer) - then as I am now going to do VAT I have remembered that there is the retention element that I need to show.
Just so you have the full picture … I have 2 purchase invoices and 2 sales invoices and therefore 2 statements with different retentions (as its based on 15%).
Do you need to pay VAT on the retentions?
Sorry I am a novice and some of the language is all new to me.
You would enter main bank only when actual cash movement happens so that it is reconciled with your bank statements
Example
You asked your supplier to produce goods worth £100+vat=120, you recorded purchase invoice when you got it from your suppliers leaving balance payable 120, now they sold it for you for £150+vat=180 , you record sales of 150+vat and they sent you balance after retention and their cost to you in you main bank as £33 (180-27(15% of 188 as retention)-120 purchases)
You will mark 120 purchase paid through contra holding bank account, Sales received for 180 in contra holding bank account leaving balance of and 60 in contra holding bank account, now record 33 transfer from contra holding bank account to main bank account, your end balance of contra holding bank account should be 27 which is retention money.
As your both purchase and sales invoices are marked as paid, system would pick vat element in vat return automatically based on payment dates
Thanks so much,
but just to add some context …
I asked my supplier to produce goods worth £12,523.56+vat=£15028.27, I recorded purchase invoice when I got it from my suppliers leaving balance payable £15028.27, now they sold it for me for £18579.83+vat=£22295.80 , I record sales of £18579.83+vat.
I get that bit, but i conjunction, rather than cash being exchanged as the deal is ongoing with the stock produced, what happens simultaneously is that …
The supplier issues me with a statement that says the total net position is £6056.27 +VAT=£7267.52. Retention is £3715.97 and the balance is £3551.56.
No actual money has changed hands.
The next quarter I get another statement where
I asked my supplier to produce goods worth £721.59+vat=£865.91, I recorded purchase invoice when I got it from my suppliers leaving balance payable on this invoice £865.91, now we have had to issue a credit note for returns of £(6066.64)+VAT = £(7279.97).
Then supplier issues me with a statement that says the total net position is £(731.96) +VAT=£(878.35). Retention is £2502.64 and the balance is £(3380.99).
Again no cash has hit anyones’s bank and it is still as a statement/running balance.
You record your procurements and sales as normal and on receipt of statement from supplier mark them paid and received respectively using contra holding bank account, issue credit note with option of actual refund issued from contra holding bank account and closing balance for contra holding bank account should equal your retention money with your supplier
Unfortunately I have already issued the credit note and there is no option of actual refund issued.
Generally at stage of credit note system gives an option to issue actual refund or reduce balance due or keep balance on account for customers in case invoices are fully or partially paid
HI going back to this, the retention that they make is actually 15% of their net invoice not invoice including VAT.
Is there anyway that you can take me through step by step using the figures that I have provided?
I do appreciate your help.
Thank you
Point of sale is important for accrual basis vat , cash basis works on how much cash you receive on sales invoice or pay on expenses, once you record sales and purchases , from there on what ever you receipts and payments you allocate against outstanding invoices, system would pick vat liability accordingly regardless what ever the basis on retention amount is
Hi there, Going back to this point. On a cash based VAT method you pay VAT on the retained amount as well? Or do you only pay it when you have received it?
You can work either way, keep it consistent, if you treat retained account as another type of bank or cash in hand a/c then system your account for vat, if you treat it as alternative debtors control a/c then system should pick when you get paid in bank