VAT in instalments

Cashflow has been a challenge for many businesses and consumers during the coronavirus period, so it is not uncommon for people to ask to pay for a product or service in instalments.

When the order is made, for example, you might ask for a prepayment from 10% to 50%. This is known in Dutch as an ‘aanbetaling’ and it is forbidden by law to ask for more than half of the costs up front. 

There is a risk for both the buyer and seller: the seller asks for a prepayment to make sure that once the product or service is made, the buyer doesn’t change his or her mind. The buyer is taking a risk that the seller will not go bankrupt in the meantime.

One question that comes up a lot, according to an expert from Blue Umbrella, is what happens with VAT when a prepayment is made for a sale.

‘If you are selling a product for €1,000 and the total cost will be €1,210 including VAT, and you take a 20% prepayment, many people ask if you have to pay the full VAT up front or even none at all,’ he said. ‘Some hotels have argued that if a room is booked but someone didn’t show up, then no service has been provided and so they should not have to pay VAT. But this is not the case, according to the Dutch tax office.’

The answer for small traders is simple: whatever prepayment you have taken needs to have the correct proportion of VAT applied and paid. Then, when the rest of the payment is made and the product or service is sold, the rest of the VAT is applied. 

So, in that example, the 20% prepayment of €200 of the product cost would also need to have VAT applied and paid, so you would ask the customer for €242, and pay €42 in VAT straight away. 

‘Even if you are a consultant, for example, you might ask for a prepayment or put in your invoices in portions for a €5,000 job, so on each instalment you have to charge the correct VAT,’ added the Blue Umbrella expert.

In theory, you should pay your VAT in accordance with the date on the bill or at least within 15 days of the month when you delivered the service or goods, and you must always invoice another company or foundation if this is your client.

Some types of businesses, however, are not allowed to use this so-called ‘cash accounting’ system, paying the VAT in instalments, which means that the VAT for a whole sale or service needs to be paid at the outset – and in this case, it is beneficial for your business to charge for the complete VAT bill at the outset, adding this to the first downpayment. 

If something goes wrong and the complete sale does not go through, you will be able to reclaim the VAT from the government, something which you cannot do with the cash accounting method.

But as the seller (and indeed as a buyer) it is a good idea to check whether the other party is likely to be able to pay the full bill, or deliver the whole product or service, before entering into a contract.