One of our clients has asked us to invoice and has made payment for works which we are yet to complete. The Invoice and payment will sit in our prior tax year and will incorrectly show profit as all expenditure against the job will occur this financial year.
We accept that the VAT will be due on this receipt but how should we deal with the advance payment element to ensure that incorrect profit is not recorded. (I am aware of the advance payment tab in the receipt window but as an invoice has been raised I am not sure if this can be used).

Hi Mark,

One option would be to create a new liability account called 'Deferred Income', then use this account on your invoice. When you want to recognise the income create a General Transaction from Sales Income to the Deferred Income account.

However, please check this approach with your accountant as he/she may prefer a different method.

Regards,

Create a new account under Liabilities called something like "Advance Payment received"
On last day of prior year do a General Transaction as follows:

From: "Advance Payment Received" account ------------ £x,xxx (Amount of Invoice)
To: "Sales income" * ---------- £x,xxx

On 1st day of this year do a reverse entry i.e.
From: "Sales Income" *-------------------- £x,xxx
To; "Advance payment ---" ----------- £x,xxx

• Or whatever you call your Income account e.g. "Work Done", "Turnover" etc

Sorry Mark , I must have been typing my tuppence worth as you were posting your reply. Hope I haven't confused things. (Both methods would work)

Thanks both for the advice,

I can see how this will work and it has affected the profit and loss report in the correct way, whilst leaving the VAT liability unchanged.

One connected issue i am slightly confused about, the invoice/payment allocates an amount of CIS Tax deducted by the client which remains on the prior year report 'CIS deducted by customers' , as tax owing on profit due is affected by this figure should I be looking to defer this also or would it be ok to leave this where it is?

HI Mark,

The CIS deduction line on the invoice is either 'Owner's Drawings and Personal Use' (if you are self-employed) or 'Income Tax and NI Liability' (if your business is a limited company). I think it's fine to leave it like this.

However, in filling our your tax return I think you will need to treat the CIS deduction as being deferred. Please check with your local tax office on this point.

Regards,