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Thread: VAT & prepayments

  1. #1
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    Question VAT & prepayments

    Hi

    A client paid us an amount ahead of services we provided him. He wanted to pay this out to us before his financial year end.

    After the services were rendered and invoices were offset against the initial amount paid, a credit balance was left which we paid over to him.

    With reference to the refunded amount, is VAT applicable?

    The initial amount was processed as a prepayment and invoices set off against it.

    I am using XERO has my accounting program.

    Many Thanks

  2. #2
    Full Member EAB's Avatar
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    No, there should not be VAT on the amount.

    When you received your initial payment you allocated it as a deposit to the client's account, without affecting VAT.

    The VAT only gets affected when you do the invoice.

    Now when you repay the credit balance, there would not be VAT on it.

    Look at it differently. A client pays you R10 000 deposit for a job. You don't declare VAT because you only do it when you invoice. Something happens and the client has to cancel. You refund the client his R10 000. Your books for that transaction will then balance, but it you claim VAT on the amount refunded to the client there will be differences.

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    Thanks for the reply EAB.

    Does it matter if the amount he paid was inclusive of VAT?

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    Diamond Member Justloadit's Avatar
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    Did you issue a VAT invoice?
    If yes, then you must issue a Credit note VAT inclusive, as the output VAT would have appeared on your VAT report for that period.
    The credit note must be done for the current period, and depending on how you set up your system, it will either fall under Output VAT as a negative offset to the total output VAT, or it will fall under the Input VAT section, which will fall under the input/output VAT calculation.
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    Customer deposit payment = R1200
    You invoice the customer for R1000 + VAT R140 = R1140.
    You refund customer = R60 payment.

    The only VAT to take into account is the invoice amount i.e. R140. The pre payment and refund payment are irrelevant in terms of VAT.

    He didn't pay you an amount "inclusive of VAT". He paid you an estimate of what you all thought would be the inclusive amount.

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