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Beware of Advances and VAT!

When your company receives an advance payment for a future transaction, you must issue an invoice detailing the principal and VAT, and pay the tax in the self-assessment corresponding to the collection date. Later, when the sale is made or the service is provided, you must issue an invoice for the remaining amount and VAT.

A customer advance is the amount of money a customer gives in advance for a sale or service. Many business owners or professionals sometimes do not pay VAT on advances due to lack of knowledge or poor advice. They think it is a provision of funds and that they will invoice everything once the final sale is made.

The advance must be documented, and this must be done through an invoice. It is not enough to do it with a receipt, a delivery note, or a proforma invoice. The document must be an invoice with the corresponding VAT, with the explicit mention of "advance."

Accrual of the Advance

If you receive an advance, you must issue an invoice. This invoice must itemize the VAT, which you will report in the next declaration. The VAT must be paid in the quarter corresponding to the collection date, not in the declaration for the quarter of the invoice date.

Therefore, when an advance is received, an invoice must be issued, itemizing the VAT, which must be reported in the next declaration, not in the declaration for the invoice issuance date. When the sale is formalized, the new invoice must deduct the received advances, reflecting only the remaining VAT to be invoiced.

Attention: It is not mandatory to issue an invoice for advances in the case of intra-community deliveries.

Incorrect Practice

Despite all this, many companies do not act accordingly and receive the advance without issuing an invoice or charging VAT, invoicing everything when the final delivery or service is made.

In these cases, the Tax Agency can detect these operations, posing a fiscal and sanction risk for the taxpayer.

For example:

- If the company records the advance payment in the customer's account (account 430), it can detect that at some point this account appears with a creditor balance.

- If the company records these advance payments as provided by the General Accounting Plan (in account 438, customer advances), the evidence will be even clearer.

- When the advance plus the rest of the operations carried out with that customer exceed 3,005.06 euros, in the annual declaration of operations with third parties (form 347), the information must be broken down by quarters. If the advance occurs in one quarter and the transaction in another, there could be inconsistencies between the debtor's and the creditor's declarations.

Sanctions

Ultimately, the Tax Agency may impose sanctions for paying the VAT on the advance late (even if everything is paid in the self-assessment corresponding to the transaction date) and for inaccuracies in form 347. Avoid this by charging VAT on advances and paying it at the time of collection.

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