Taking multiple years maintenence in advance

Accounting
1

I have to option to add customer’s maintenance for capital equipment to a lease. This would mean I will have the money for three years maintenance in one hit. Is there a way I can allocate this to year two and three to avoid it being treated as taxable income I year one?

Thanks

2

Are you on accrual or cash accounting and are you VAT registered?

You could assign it to a customer account as a prepayment but exactly how this is handled is different depending on the above variables. In a nutshell, VAT is due on the full amount regardless and the prepayment will be taxable if you are on cash accounting.

3

Hi Lurch

Thanks for your reply

No not on cash accounting but I understand the VAT will be payable in the 1/4 when payment was taken, that’s not a problem. So if I allocate it the future years (2017 and 2018) as a prepayment does that take it out of the reckoning for the current year’s tax?

4

As far as I understand it (as a non-accountant) accrual accounting is all about what you have invoiced, not what you have received so as long as you have no current invoice for the maintenance in years 2 & 3 then you can defer it via a prepayment on account.

If you have to invoice the full amount at the beginning of the lease then it will be accounted for on that invoice so the prepayment won’t be applicable.

5

There’s a difference between the treatment for VAT purposes (you owe all the VAT to HMRC in the quarter that includes the invoice) and for profit and loss purposes (where you want to apportion the appropriate amounts to the relevant accounting years). The VAT should be handled automatically if you’ve included it on a sales invoice.

For apportioning the income to the relevant years, double check with your accountant, but I believe you could just journal the (ex VAT) amount for 2017 and 2018 from the nominal where you booked the invoice over to prepayments on the last day of your 2016 accounting year, and journal the appropriate amounts back the other way on the first days of the 2017 and 2018 years. This moves the “invoiced but not yet earned” income onto your balance sheet rather than your P&L for 2016, and then puts it back into P&L for the year where it is actually earned.

6

Thanks your your help

Most useful
Martyn