Deposits and advances: 4 tax checks
Earlier lessons dealt with the invoice after a sale is complete. This one covers a situation that comes before the sale and confuses many owners: the customer pays a deposit or an advance before you deliver the goods or finish the service. The question is not purely an accounting one: is VAT due on that money today, or do you wait until delivery?
What triggers the tax point
Under the VAT law and its implementing regulations published by the Zakat, Tax and Customs Authority, tax becomes due on the earliest of three dates: the actual date of supply, the date the invoice is issued, or the date consideration is received in whole or in part. In practice that means receiving an advance itself triggers the tax point, to the extent of the amount received, even though you have delivered nothing yet. The authority's own published text always governs.
| Case | Due on receipt | Deferred |
|---|---|---|
| Deposit against an agreed supply | Tax on the amount received | The rest of the deal until delivery or invoicing |
| Supply delivered and fully invoiced before payment | Tax on the full invoice value | Nothing |
| Refundable security amount that is not consideration | Nothing due on receipt alone | Reassess if it becomes part of the price |
The third row is where mistakes live: whether money is a deposit or a refundable security depends on the substance of the agreement, not on the wording you typed on the receipt. When in doubt, check the authority's rules or your tax adviser before you settle on a treatment.
Four checks before you record any advance
- Is the money consideration for a supply? Ask: if the customer completes the deal, does this amount come off the price? If yes, it is a deposit that carries VAT, not cash held in trust.
- When did the money actually arrive? The tax point follows the date consideration is received, not the date the agreement was signed or the expected delivery date. A transfer that lands on the last day of a tax period belongs to that period, not the next one.
- Did you issue an invoice for the advance? An advance payment is matched by an invoice for its value, then a balance invoice on delivery. A payment receipt on its own does not stand in for an invoice.
- What if the deal is cancelled? If the deposit is refunded or the order is cancelled after the advance invoice was issued, you correct it with a credit note, not by deleting the invoice. See the lesson on credit and debit notes.
The working rule: tax moves with the first event that happens, not the last. Cash arriving is an event.
A concrete example: a deposit arriving over WhatsApp
A kitchen workshop owner receives a transfer from a customer and messages the system:
Received a 3,000 riyal deposit for a kitchen order, total 12,000, delivery in a month
The system does not file it as a silent cash receipt. It replies:
This is a deposit against a supply, so tax is due on it today. I will issue an invoice for the amount received and send it to the customer, and record the remaining balance as an open order. Is the amount inclusive of tax?
After delivery, the system reminds the owner to issue the balance invoice instead of waiting for the accountant to spot the gap at period end. That is the practical difference with invoicing over WhatsApp: the tax rule fires the moment money lands, not two months later.
The common mistake: a deposit in the till with no invoice
The most frequent error is recording the deposit as a payment receipt only and postponing invoicing until delivery day. The tax period in which the money arrived passes without the amount appearing in the return, and it surfaces later during reconciliation or an audit, to be handled through an amended return and whatever follows from it. The lesson on paying, correcting and penalties covers that route.
Checklist
- Make an "amount type" field mandatory on every collection: deposit, refundable security, or settlement of an existing invoice.
- Link every deposit to a specific order or quotation so the system knows the remaining balance.
- Issue the advance invoice on the day the money is received, not on delivery day.
- Review monthly the list of open deposits with no balance invoice yet issued.
- State in the agreement whether the amount is refundable; that sentence decides the treatment in any dispute.