Advance payment to the supplier also represents an advance in the accrual of VAT.
Advance payments to suppliers are a challenge for treasury.
In most businesses, advance payment to suppliers is not the norm. In fact, it is usually normal for there to be a payment period from the delivery of the goods
cuba email list or the provision of the service. In recent years, legal measures have been taken to reduce these time periods, especially to avoid cases of abuse when the supplier is an SME.
In a certain sense, paying in advance is like turning the situation around. It is the buyer who has to finance the transaction for a certain period . However, this is not always an easy situation for SMEs. In many cases, it is they who have to advance money to other companies.
A very high price . In this way, the supplier tries to cover itself against certain risks, such as working on an expensive order that does not end up materializing.
A very long period to complete production . The supplier avoids having to finance its operating cycle for too many days. In addition, it minimizes the probability that the customer will cancel the purchase while waiting.
It can be used as a measure to mitigate late payments . If the client has already paid an amount, the supplier may think that we are solvent and willing to meet our obligations in a timely manner.
A request to regular customers to alleviate some treasury problem .
In any case, it is important to have a global vision before making a decision to advance a payment . To do this, it is best to have tools such as Sage 50 that combine accounting and management.
2) Advance payment to suppliers and VAT
VAT is generally due at the time of delivery of the goods or provision of the service. In the case of advance payments, the tax is due at the time of full or partial collection of the price for the amounts received.
Advance payment to the supplier brings forward the moment of VAT accrual, which occurs at that very moment.
One of the special cases is when payment is not made in advance, but rather through a transaction involving bills of exchange or promissory notes . For example, you accept or endorse a bill of exchange. From then on, the supplier could look for a way to convert it into cash through a new endorsement or a discount. However, this does not give rise to VAT being accrued, but rather it will be accrued when the drawee pays the holder.
3) What should an advance payment invoice look like?
Normally, the supplier must send you the invoices when the goods are issued. However, since in this case the VAT accrual is advanced, the following deadlines will apply :
In general, until the 16th of the month following the accrual, which will have occurred at the time of the advance payment.
If the recipient is a businessman or professional, even in transactions subject to the cash regime , the deadline is up to the 16th of the following month. However, if the recipient had not been such, the invoice should have been issued at the same time as the transaction.
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Learn all the details about how advance payment to suppliers works, what it is and how it is accounted for.
4) The imputation of advance payment to suppliers in the IS
In corporate tax, the general rule is to allocate the amount as the accounting accrual occurs . In addition, an expense is not usually deductible in this tax until it has been accounted for. Therefore, an advance payment does not allow the expense to be deducted earlier or, consequently, delay the payment of the tax.
However, there are other possibilities. One of the cases is when the taxpayer proposes other criteria for time allocation. This is done in order to obtain a true image of the assets, financial situation and results.
The reasons why the general principle is not applied and its influence on the company's assets, financial position and results must be stated in the report. It is also permitted not to apply the accrual principle when the effect is insignificant and does not alter the expression of the true and fair view.
The application of these criteria requires prior approval from the Administration .
5) Advance payment to suppliers and personal income tax
Individuals who declare the income from their economic activities in the Personal Income Tax generally allocate their income following the criteria of the corporate tax . Following this rule, it would not be possible to delay the payment of the tax by paying suppliers in a period prior to the delivery of the good or the provision of the service.
However, some taxpayers may decide to apply a criterion of temporary imputation of collections and payments . Thus, they would declare the expense in the period in which the payment was made and not the delivery. In exchange, among other aspects, they have to declare advance collections from clients in the period in which they occur. In order to apply this criterion, certain requirements and conditions must be met :
You are not required to keep accounting records in accordance with the Commercial Code. You must keep your accounting and registry obligations using the corresponding tax books.
The option for this criterion is stated in the income tax return and you must maintain it for three years.
You lose this option if you are subsequently required to keep accounting records in accordance with the Commercial Code.
If you follow this criterion for one economic activity, you must follow it for all the ones you carry out.
Changes in criteria will not prevent pending expenses or income from being allocated. Nor will it mean that expenses or income that have been allocated will be allocated again.
6) Accounting for advances to suppliers
The normal accounting scheme for advance payments to suppliers is as follows:
The payment will be charged to account 407 for the sum of the amount excluding VAT that you have paid and the non-deductible part of the VAT. You will also charge the deductible part of the VAT incurred to account 472. All of this will be credited to the corresponding treasury accounts for the total amount of the payment made.
