Retention money

JodieR

In 2011/12 client invoices customer £100 but customer pays only £97.50 (less 2.5% retention), and the retention money is only partly received in the following year, does his sales income in 2011/12 need to be £100 or £97.50? I know for VAT it's not due until the money's been received but does it work the same for income tax?

PGM

Whether right or not, we only raise the invoice for the retention once the money is due, raising liabilities then...

I would like to know the definitive answer.

johnnyboy987

Not sure on a definitive answer but I would be inclined to say that £100 is treated as sales revenue, with the 2.50 being accounted for as an asset (money due in, almost like a debtor)... I have a feeling it might be better treated as an accrual but I'm not quite there in my studies yet lol

So Original Invoice would be : Dr Retention £2.50, Dr SLCA £97.50, Cr Sales £100
When retention becomes due : Dr SLCA £2.50, Cr Retention £2.50

As I say, not a definitive answer but it's how I understand retention from what I've seen at work (Construction). VAT/Income Tax I'm not sure about...

Hope that helps

K H

Firstly i would advise only to mark your request for payment as an 'application for payment' not an invoice, as main contractors in the construction industry are notoriously slow payers and you might find yourself paying over the vat to hmrc long before you get it.
Most contractors operate an authenticated receipt system whereby the output vat is due on receipt of payment.
With regard to tax i would include the full amount of £100 in turnover but carry forward a creditor for the same amount to cover any potential costs during the period up to when the full retention is released.

PGM

PGM wrote: »

Whether right or not, we only raise the invoice for the retention once the money is due, raising liabilities then...

I would like to know the definitive answer.

I must have been half asleep when typing that. We do accrue for the income once its due! So we do create a tax liability but not a vat one until it because payable and we raise the invoice.

I should consider doing requests for payments, especially on larger values

JodieR

Thanks for the replies. Just out of interest would you still include the same amount if the contactor has a history of not paying the retentions or only paying part of them?

PGM

JodieR wrote: »

Thanks for the replies. Just out of interest would you still include the same amount if the contactor has a history of not paying the retentions or only paying part of them?

If you thought you were unlikely to receive the money, you would be wrong to accrue for it anyway.