How to declare customer down payment?
Down payments are declared for VAT when they are collected and down payments are declared for corporate income tax when the product or service is delivered. We could end the article here.
Although this article is NOT done with AI we are going to extend it a bit more and give examples for you to understand, if you have not already done so.
If your company receives an down payment from a customer, how should it be taxed on this down payment for VAT and corporate income tax purposes? See below how to proceed in these cases…
Customers down payments and VAT
Down payment and the date of collection
If your business collects an down payment on account of a future transaction, for VAT purposes, the tax becomes due on the date of collection (no matter when the transaction is to be carried out).
It is on that date that your company must issue an invoice showing the principal and VAT and pay the tax in the self-assessment for the period of collection.
Example of down payment
For example, if you receive an down payment of 10,000 on 27 March 2024:
- On the invoice you issue, you should state 8,264 euros (10,000/1.21) principal and 1,736 euros VAT.
Later, when you make the sale or provide the service, you should issue the invoice for the remaining amount and VAT.
- This VAT must be declared in the VAT self-assessment for the first quarter of 2024 (or for the month of March if you declare monthly).
Down payment with promissory notes or bills of exchange
Be aware: if you are paid in down payment with a promissory note or an accepted draft, VAT will also be due on the date your customer makes the payment (not when the promissory note is handed over to you). Be very careful with this!
This is true even if your company deducts the bills of exchange at the bank.
Example of an down payment charged by promissory note
For example, if in December 2023 your company received a promissory note of EUR 12,100 (EUR 10,000 plus VAT) due in January 2024 and discounted it on 30 December, you will have to declare the VAT on the return for the first quarter of 2024, when the customer pays.
How is the down payment declared on Form 347?
If you have collected an down payment at the end of 2023, you must declare it on form 347, allocating it to the quarter of collection (and provided that this down payment, added to the rest of the transactions carried out with this customer, exceeds 3,005.06 euros).
And if the transaction is carried out in 2024, it must be declared in full on form 347 in 2024, subtracting the amount imputed in 2023.
How is a customer advance payment declared for corporate income tax purposes?
Date of the down payment transaction in the IS
In contrast to VAT, in Corporate Income Tax (CIT) the date on which transactions are accrued and deemed to have been carried out, except in special cases (such as the instalment transaction system), is the date on which the goods are delivered or the service is rendered.
It is at that time that the revenue from the sale must be declared, irrespective of the time of collection.
If your company collects an down payment of invoices, this will have no effect on the turnover for the year or on the accounting result.
Example of an down payment for corporate income tax purposes
Your company is a manufacturer of industrial machinery and on 15 December 2023 you received an down payment of 9,680 euros, on account of the delivery of a machine to be produced in March 2024.
The total amount of the sale is 50,000 euros, plus 21% VAT.
In this case, your company must record the following entries in its accounts:
Advances from customers accounting entry
Collection of the down payment (15 December 2023):
| Account | Debits | Credits |
| (572) Bank | 9.680 | – |
| (438) Down Payment | – | 8.000 |
| (477) Passed-on VAT 21% | – | 1.680 |
Delivery of the machine (March 2024):
| Account | Debits | Credits |
| (430)Customers | 50.820 | – |
| (438) Down payment | 8.000 | – |
| (477) Passed-on VAT 21% | – | 8.820 |
| (700) Sales | – | 50.000 |
A summary...
If you receive an advance payment for a future sale, you must charge VAT on the amount received. However, the revenue from the sale should not be accounted for until the date on which the goods are delivered or the service is rendered.
