VAT on deposits: when it's due and how to invoice it
A deposit creates its own tax point, so the VAT on it belongs in the return for the period you took it. How to invoice deposits and the final bill without charging VAT twice.
By The Osmuch team · · 6 min read
In short
- For a VAT-registered business, a deposit towards a job is part of the price, and VAT is due on it.
- The tax point is the earlier of when you receive the deposit and when you issue a VAT invoice for it.
- That means the deposit's VAT goes in the return for that period, even if the job finishes months later.
- The final invoice charges VAT only on the balance, so VAT is paid once across the two documents.
- A genuinely refundable security deposit is different, and your accountant can confirm which you have.
Taking a deposit before starting work is normal for a trade business, and it raises a question that catches people out: when is the VAT on it due? The short answer, for a VAT-registered business in the UK, is when you take the deposit, not when you finish the job.
This is general information about how VAT on deposits usually works in the UK. How it applies to you can depend on your VAT scheme and the details of the job, so check anything unusual with your accountant.
A deposit is part of the price
When a customer pays a deposit towards a job, they are paying part of the price of that job in advance. HMRC treats that advance payment as creating its own tax point: the earlier of the date you receive the payment and the date you issue a VAT invoice for it. The VAT on the deposit is due in the return for that period.
So if you take a deposit in March and finish the job in June, the VAT on the deposit belongs in the return that covers March, and only the VAT on the balance goes in the return that covers June.
A worked example
| Net | VAT | Total | |
|---|---|---|---|
| The whole job | £1,000.00 | £200.00 | £1,200.00 |
| Deposit invoice (30%) | £300.00 | £60.00 | £360.00 |
| Final invoice (the balance) | £700.00 | £140.00 | £840.00 |
| Across both invoices | £1,000.00 | £200.00 | £1,200.00 |
The customer pays £1,200 in total and £200 of VAT is accounted for, once. The £60 goes in the return for the period the deposit was taken, and the £140 in the period of the final invoice.
How to set out the final invoice
The clearest final invoice shows the full price of the job, then a line taking off the deposit already invoiced, with the VAT worked out on what is left. The customer can see what they already paid, and nobody is charged VAT on the same money twice.
The mistake to avoid is taking the deposit off at zero VAT. That leaves the deposit's VAT charged twice: once on the deposit invoice and again on the final one.
Jobs at more than one VAT rate
If a job includes work at different rates, for example some standard-rated and some reduced-rated, the deposit should carry the same mix of rates as the work it is a deposit for. A deposit charged entirely at one rate is only right by luck.
Security deposits are different
A deposit held purely as security and returned afterwards, such as a deposit against damage to hired equipment, is not payment for the job and does not usually carry VAT. If you are not sure which kind of deposit you are taking, ask your accountant.
Questions
Do I charge VAT on a deposit?
If you are VAT registered and the deposit is part of the price of a job that is subject to VAT, yes. The VAT on the deposit is due for the period in which you receive it or invoice it, whichever is earlier.
Which VAT return does a deposit go in?
The return covering the date you received the deposit or issued the VAT invoice for it, whichever came first. The VAT on the rest of the job goes in the return covering the final invoice.
What if a job is paid in several stages?
Each stage payment creates its own tax point in the same way. Invoice each stage with its VAT, and take all of them off the final invoice at the rates they were charged at.
Doing this in Osmuch
In Osmuch you can request a deposit on a quote or a project, as a percentage or a fixed amount, and it is invoiced at the same VAT rates as the work it is a deposit for. When you invoice the finished job, every deposit raised on it comes off automatically as its own line, at its own rate, so the VAT on the job is charged once across the documents. Each invoice's VAT lands in the VAT return for the period it belongs to.
Guide: asking for a deposit · Guide: how vat works in osmuch · Guide: invoicing a completed job