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When is it deferred income??

LizRLizR New MemberRegistered Posts: 7
Can someone help me with deferred income as it's something I haven't had to deal with before?

If a customer is paying in advance for something to be installed (a micro hydro system in this instance) should the money be considered as deferred income until it is actually spent? If so, how is the vat dealt with?

I think I may have been viewing things too simplistically i.e. if you invoice for something and charge vat then the revenue is yours and it goes into the P and L account. Can you raise a Vat invoice to a customer and then regard it as deferred income??

Comments

  • readerreader Experienced Mentor MAAT, AAT Licensed Accountant Posts: 1,042
    LizR wrote: »
    Can someone help me with deferred income as it's something I haven't had to deal with before?

    If a customer is paying in advance for something to be installed (a micro hydro system in this instance) should the money be considered as deferred income until it is actually spent? If so, how is the vat dealt with?

    I think I may have been viewing things too simplistically i.e. if you invoice for something and charge vat then the revenue is yours and it goes into the P and L account. Can you raise a Vat invoice to a customer and then regard it as deferred income??

    My understanding is that if your year end is let's say 31/10/2012 and you raise a sales invoice dated 31/10/2012 for work that will be done in 30/11/2012 you can defer that income in the 31/10/2012 accounts by DR'ing sales and CR'ing deferred income.

    Regarding your VAT issue, I guess it depends if you prepare your VAT returns on an invoice basis (i.e. sales vat and purchase vat is calculated with reference to the dates on the invoices) or a cash basis (i.e. sales vat and purchase vat is calculated with reference to when the money is actually receive or paid).

    If you calculate your VAT returns on an invoice basis then the VAT becomes payable based on the invoice date, however if you prepare your VAT returns on a cash basis then I think the VAT becomes payable based on when you actually received the money (regardless or invoice date or when you actually decide to do the work).
  • LizRLizR New Member Registered Posts: 7
    Thank you. Can I just outline my problem re the Vat (invoice basis)?

    If a Vat invoice is raised for, let's say £50,000 plus vat of £1000 in November (first month of the new financial year) and the money is immediately received then I would consider the vat of £1000 would be due at the end of that quarter. But if the money is being treated as deferred income because the actual work probably won't be completed for six months then that means that Vat is payable on funds that aren't officially treated as revenue yet.....At the moment I'm arguing that if money coming in is to be treated as deferred income then it should just be invoiced on a proforma basis.
  • readerreader Experienced Mentor MAAT, AAT Licensed Accountant Posts: 1,042
    LizR wrote: »
    Thank you. Can I just outline my problem re the Vat (invoice basis)?

    If a Vat invoice is raised for, let's say £50,000 plus vat of £1000 in November (first month of the new financial year) and the money is immediately received then I would consider the vat of £1000 would be due at the end of that quarter. But if the money is being treated as deferred income because the actual work probably won't be completed for six months then that means that Vat is payable on funds that aren't officially treated as revenue yet.....At the moment I'm arguing that if money coming in is to be treated as deferred income then it should just be invoiced on a proforma basis.

    "There is a strict time limit on issuing VAT invoices. You must normally issue a VAT invoice (to a VAT-registered customer) within 30 days of the date you supply the goods or services - or if you were paid in advance, the date you received payment. This is so your customer can claim back the VAT on the supply, if they're entitled to. You can't issue invoices any later without permission from HMRC except in a few limited circumstances."

    http://www.hmrc.gov.uk/vat/managing/charging/vat-invoices.htm#9

    So it looks like your argument is right- i.e. you can defer the VAT by issuing a proforma invoice but you'll only be able to defer the VAT for 30 days (at which point you must raise a VAT invoice). Interesting! I learn something new on this site everyday.
  • jamesm96jamesm96 Experienced Mentor Registered Posts: 523
    LizR wrote: »
    If a customer is paying in advance for something to be installed... should the money be considered as deferred income until it is actually spent?

    Not in this instance, no. Deferred income (like Reader has said) relates to income rather than expenditure. A payment in advance for something to be installed is a Prepayment (Dr Prepayments Cr Bank / Cash).

    Deferred income is where you have an asset (either cash or a debtor) as a result of a sale, where you haven't actually fulfilled your part of the sale yet; I guess it's a bit like your example of the person who's paid in advance, but from the point of view of the person they're buying from.

    As an example, on 31 March 2012 Smith Builders Ltd agree to build an office for Bloggs Ltd for £100,000 and Bloggs Ltd pay 50% up-front there and then.

    So in their respective accounts for the year ended 31 March 2012, Smith Builders Ltd will Dr Bank £50,000 and Cr Deferred Income £50,000, whilst Bloggs Ltd will Cr Bank £50,000 and Dr Prepayments £50,000.

    The VAT is a separate issue and depends on (again, like Reader said) whether they're on the Cash Accounting scheme, and also (if they're on 'traditional' / 'accruals' accounting) on where the tax point falls: http://www.hmrc.gov.uk/vat/managing/returns-accounts/tax-points.htm
  • jamesm96jamesm96 Experienced Mentor Registered Posts: 523
    Sorry... I've just realised your question was from the point of view of the supplier not the customer!
  • LizRLizR New Member Registered Posts: 7
    Yes, it's from the point of view of the supplier. So, you agree it is deferred income? But would you agree Mike that you can't raise a vat invoice from the supplier to the customer and then treat it as deferred income?

    Next question! Do you legally have to treat the payment up front as deferred income until the work is finished?
  • stevefstevef Well-Known CarmarthenRegistered Posts: 258
    You have to apply the matching concept (income and its matching expenditure should be recorded in the same accounting period). Also the prudence concept indicates that expenditure should be charged to comprehensive income statement as soon as it is committed, whereas income only recorded when there is certainty over it being received (if paid up front in diffeerent accounting period to the work being carried out you may have to refund it, so it becomes deferred income untill expenditure incurred when there will be certainty and it can be matched).
  • LizRLizR New Member Registered Posts: 7
    Does one still have to treat it as deferred income if the work is being done within the financial year?

    OK, so we send out a vat invoice for £40% up front in November. This work is likely to be finished within our financial year i.e. before October 31st. However, it may not be finished until - say August. Should that money be treated as deferred income until that point? And if so, how do we treat the vat? The vat would presumably still fall due at the end of January but if the money received is still being treated as deferred income at that point then we are paying out vat on something that is not yet considered as a sale.

    Sorry to be so thick but I really do need to understand what to do here!
  • stevefstevef Well-Known CarmarthenRegistered Posts: 258
    Treat the VAT and accounts separately, VAt has to follow the VAT rules, so due in Jan.

    In the accounts following GAAP (either UK GAAP or IFRS depending on which bag of tricks you are following). If the work finished before Oct 31, no deferred income, all sales. If the work drifts beyond Oct 31, really you should apportion income on the basis of the year where the expendture is. So if by Oct 31, you have completed 75% of the work (and charged the expenditure to the accounts), take £30 as sales and £10 as deferred. From a practical point of view, this is a year end exercise (part of your accruals process) so depending on your significance levels and rounding policies, it may not be worth it. For example, my accounts are presented rounded to the nearest £ thousand, with the introductory statements present in millions with one or two decimals, so would a £10 income be worth deferring, but an advance rent received of £10k would be.
  • LizRLizR New Member Registered Posts: 7
    Hooray!! Thank you, thank you! The directors have been arguing that money I would treat as sales should be treated as deferred income and put in a different bank account on a different system! And as for the vat , well they've been doing very odd things.
    So, to recap, the payment up front can be treated as a sale provided the work is completed during that financial year. If it's not, a proportion needs to be treated as deferred income in the year end accounts.
  • stevefstevef Well-Known CarmarthenRegistered Posts: 258
    Yep, thats right.
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