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Is advance invoicing a problem?

Q. Our business uses the cash accounting scheme. We want to sublet part of our factory premises to a tenant, charging VAT on the rent. We will raise a sales invoice to the tenant on 25 March each year, showing the total rent due for the twelve-month period starting on 1 April thereafter. The tenant will pay the rent on a monthly basis throughout the year, and we will account for output tax on each payment as it is made. Does this arrangement cause a problem with the cash accounting scheme?

A. There is a problem here because certain transactions are excluded from the scheme and normal VAT accounting applies, i.e. output tax is declared on a return based on the date of the sales invoice rather than the date when payment is received. One of these exclusions is if an invoice is raised in advance of a supply of goods or services, as is the case here. See VAT Notice 731 for more information (see The next step )

A practical solution would be to issue a “rental statement” or “pro forma invoice” in advance of the rental year, i.e. not a VAT invoice. These documents would not create a tax point, so avoid a VAT problem. You could also itemise each payment on an advance sales invoice, showing twelve different tax points on the invoice to coincide with each monthly payment date. This type of invoice is common in the leasing industry.

For a link to VAT Notice 731, visit http://tipsandadvice-vat.co.uk/download (VA 10.04.08).