How to apply credit of VAT to customer

HMRC have agreed to deregister VAT for the company commencing from 1st June. All VAT has already been paid to HMRC up to and including 31st May 2019.
We have been told to repay to the customers the VAT that was charged to them during June.
Many of these customers will have further business with us.
Can I just issue a credit note to the customer and let it sit there until we see them again?
Is there anything special I have to do because it is VAT being returned to them?
Desktop version 19.6.82 on Mac
Thank you

I don’t think this is a Manager specific question.

If customers file their own vat returns they would probably need to file a correction on their end too.

Yes, there is. You need to purge VAT assessments for any June sales invoices from your system. In my opinion, the best way to do this will be to issue a payment form, as though the customer exchanged goods (or services). See this Guide: The Guide covers only the exchange of goods, but is just as applicable for services. The situation is akin to the customer returning the goods or services purchased with VAT applied and receiving in their places the same goods or services purchased with no VAT.

Be sure to enter the “returned” goods or services as positive numbers on the payment form (with VAT) and the “replaced” goods or services as negative numbers (with no VAT). The result will be a payment total equal to the VAT being refunded.

Note: this assumes the customers have already paid the invoices involved. If they have not, you could simply edit the invoices by deleting VAT and provide the edited invoices to the customer with an explanation. If the customer has not paid, be sure you do not get crossed up with the customer paying the revised amount and also receiving your refund payment, or you will have to sort that out. It may be easier to let the customer pay the original full amount, since they don’t know about the VAT deregistration, then surprise them with a refund payment.

Sorry delay in responding and thank you for your answer.

This is what we originally received by email from accountants:- > For all invoices you have issued from 1 June onwards you will need to issue credit notes and repay the VAT to your customers.

All our customers paid in full on date of sales invoice. Although accountants say “issue credit notes” I don’t believe it’s possible to issue a credit note as showing VAT only. I have endeavoured to understand your guidance but regret I am confused.

We are a garage and don’t hold a data base on customers. For those customers who are ‘private’ as opposed to ‘business’ I can see that I can just edit the sales invoice so it doesn’t have VAT but shows the total figure paid. Morally we should probably return the VAT but if they are ‘one-offs’ that’s impossible. For those we know should return I could edit the form so there is no VAT but shows what was the net figure before VAT added. Since they paid the higher amount this would sit on the system as an overpayment and would reduce the amount payable on their next sales invoice.
That would leave me with the few businesses who may already have used the sales invoice VAT on their own VAT return. Could I issue a credit note with the current date clearing the ‘wrong’ sales invoice and issue a correct sales invoice using current date.
As a bookkeeper who endeavours to put the right figures in the right ledgers for the accountants I’m unsure how all this affects our own VAT ledgers other than there shouldn’t be any VAT showing 30th June 2019.
Thanking you for your kind assistance.

@patchworkfields the issue here is that your customers will have an invoice(s) (or receipt forms) that are showing that you have charged them VAT, and potentially all of them may be relying on these invoices (receipt forms) to claim a VAT refund. You need to issue them a new invoice showing the charges without the VAT.

This is how I would handle it:

  1. Make every attempt to identify every customer that it concerns.

  2. Issue a credit note to these customers for the full amount of the originally issued invoice (receipt form), including the original VAT amount. If a receipt form was issued, create new customer (if not already in database) to issue the credit note.

  3. Issue a new invoice for the original amount less the VAT and do not apply VAT code to this new invoice.

  4. If there are any sales for which you are unable to identify the customer, create a customer called, say, “Sundry Debtors” and perform steps 1 and 2 for these pending identification of these customers.

  5. Wait, say, about six months to allow for identifying unknown customers and after this period, record any left over credit balance to sales revenue.

@AJD’s method will work, but is incomplete, because it does not include refunding the VAT to the customers. The method I outlined originally overcomes this shortcoming without the intervening credit note. The payment form alone effectively buys back the services on which VAT was erroneously charged and resells the same services without VAT.

The customers, in turn, will be recording the VAT on the return aspect to offset what they have already recorded on the original purchase.

The process I suggested will produce a credit balance for the affected customers. This then gives the option to either refund the credit or apply it to the known customers next invoice. This could also be done for the unknown customers as and when they are identified. Leaving point 5 for customers that cannot be identified within a reasonable timeframe.

1 Like

There is no disagreement here, just two approaches to accomplishing the same thing. @patchworkfields’s crucial question was, “Is there anything special I have to do because it is VAT being returned to them?”

The answer from everyone was, “Yes.” However it is accomplished, the original sale with VAT must be reversed and a new sale without VAT recorded.

Thank you - everyone. I have decided I must understand what I am doing so that, at the worse scenario, I can account for my decision and explain it to incoming bookkeeper, accountants or even HMRC. I will go with @AJD’s suggestion by reason of my (hopefully) understanding it. It will change my VAT to zero from 1st June onwards (because credit note is issued against original sales invoice) and will leave what is effectively an overpayment on the new sales invoice issued. I shall be finishing work March 2020 after a lifetime of figures! Thank you once again for all your efforts.

If you go that route, @patchworkfields, you would probably be better off to then issue the payments to zero the customer balances in Accounts receivable. Otherwise, you will be stuck with all those overpayments. Overpayments are not automatically credited against sales invoices but remain with the invoice on which they occurred. (They used to roll forward, but not in the current version of the program.)

Thank you @Tut for that advice. I intend to do these changes tomorrow - very slowly and carefully!