Opting for value-added tax (VAT) on receipt is a smart move for eligible businesses that want to improve their cash flow management. It provides more flexibility for VAT payments, though it might need strict accounting organisation.

What's in this article?

• What is VAT on receipt?
  
• How does VAT on receipt work?
  
• How is VAT on receipt declared?
  
• Who can use VAT on receipt?
  
• Pros and cons of VAT on receipt
  

What is VAT on receipt?

VAT on receipt, also called “VAT on sales,” is a tax system in which a business deducts VAT when it receives payment for its services.

This contrasts with VAT on invoicing, or “VAT on debit,” in which a business calculates VAT based on the total amount of invoices issued.

VAT on receipt is an option under the normal tax regime, letting a business defer VAT until it receives payment from the customer rather than when it issues the invoice.

How does VAT on receipt work?

Invoicing

When a business provides a service to a customer, it issues an itemised invoice. This shows the exact price of the service provided, excluding VAT. You add VAT, an indirect tax supporting public services, to this amount. The VAT rate you apply depends on the type of service and the country where you provide it. The total invoice amount, including taxes (“toutes taxes comprises,” or TTC), is the sum of the pre-tax price and VAT.

Receipt

For the sale of goods, you pay VAT on the delivery date. However, for services, you apply VAT to all incoming payments, including deposits, advances, or other partial payments.

For services, the work often takes longer and you might bill in instalments. When the business receives payment from the customer, it calculates VAT based on the amount received.

How is VAT on receipt declared?

Under this regime, you can defer VAT until you receive payment. You must report the collected VAT and pay it to the tax authorities within the required time frame.

When a business reports its VAT, it must complete form n°3310-CA3. The form must clearly state that the business has chosen the VAT on receipt system, letting the tax authorities apply the specific rules of this system and prevent any risk of reassessment.

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Who can use VAT on receipt?

VAT on receipt is well suited for service businesses such as communications agencies, which offer services such as website design, online advertising campaign management, or communications consulting. These businesses often invoice their services to businesses that might take several days or months to pay.

When a communications agency chooses VAT on receipt, it needs to pay VAT only on the amounts received from its customers, regardless of the delay between providing the services and receiving the payment.

For example, if an agency provides services valued at €10,000 excluding VAT in September, it will need to pay €2,000 in VAT. Its customers might pay €7,500 excluding VAT in October, which means €1,500 in collected VAT, and then pay the remaining €2,500 excluding VAT, or €500 in collected VAT, in November.

In this case, the agency declares nothing in September. In October, it must declare €1,500 in collected VAT, and in November, €500.

Pros and cons of VAT on receipt

Pros

• VAT on receipt provides several benefits for businesses. Its calculation is typically simpler because it is based on actual payments received, meaning the amounts the business sees directly in its account.
  
• VAT on cash receipts also helps with cash management because it reduces the risk of bankruptcy. Businesses can improve their cash flow management by deducting VAT when they receive payments.
  
• This system provides a distinct advantage in managing financial risk. By deferring VAT liability until they receive payment, businesses reduce the risk of paying taxes on unpaid invoices.
  

Cons

• One drawback of VAT on receipt is that irregular customer payments can cause significant fluctuations in the amount of VAT you declare. As a result, the amounts due can fluctuate significantly from month to month.
  
• VAT on receipt adds a level of complexity to VAT accounting and reporting. Customers might pay in several instalments over several months, with different due dates. A business can also enter into a VAT reverse charge agreement with certain customers, further complicating the reporting process. Businesses with a high volume of customers and invoices might find it more challenging to manage VAT on receipt.