Advance Invoice and Prepayment Invoices in ZATCA: A Comprehensive Guide

Updated On : Feb 08th, 2024 | 23 min read

A Comprehensive Guide to declare VAT on advance invoices and prepayment invoices to ZATCA without double VAT payments

Managing customer advances is pivotal for any enterprise, especially given the intricacies of the Sales Management process. With companies routinely receiving advances for the delivery of goods or services, understanding the nuances of different advance types becomes essential. These can be categorized as:

1. Order-specific advances
2. Adhoc advances (not order-specific)
3. Milestone-based advances (aligned with payment schedules in invoices)

It is vital that businesses adjust these advances in subsequent Sales Invoices or Direct Finance invoices. As per the ZATCA guidelines,VATaccrued in these advances must be promptly declared post-transaction. A strategic approach ensures businesses dont inadvertently pay double taxes: once for the advance and again for the invoice.

ZATCA E-invoicing Solution

ZATCA'sPhase 2 e-Invoicingoffers businesses a robust solution to seamlessly manage their advances. Among the available options for advance or prepayment adjustments in invoices include:

1. Single advance/prepayment linked to one invoice
2. Single advance/prepayment distributed across multiple invoices
3. Multiple advances/prepayments apportioned over various invoices
4. Several advances/prepayment tied to a single invoice

It is vital that businesses adjust these advances in subsequent Sales Invoices or Direct Finance invoices. As per the ZATCA guidelines,VATaccrued in these advances must be promptly declared post-transaction. A strategic approach ensures businesses dont inadvertently pay double taxes: once for the advance and again for the invoice.

The Process at a Glance

1. When an advance invoice is generated in the ERP or Source system, its forwarded to ZATCA as a standard Tax invoice but tagged as Advance (with a fixed Invoice Type Code (BT-3) value “386”). This action registers the VAT amount in ZATCAs system for the specific business and customer.2. When the actual invoice is later created, its sent to ZATCA as either a Tax or Simplified invoice but categorized as “Invoice” (fixed Invoice Type Code (BT-3) value “388”). Along with this, the advance data must also be transmitted. ZATCA expects details such as:

1. Tax category (BT-1) Advances or prepayment can be from domestic customer, international customer or even intercompany. The types given are
2. S Standard
3. Z Zero VAT
4. E Exempt
5. O Export
6. It is mandatory to provide the above information
7. Advance or prepayment number and UDID
8. Invoice number of the advance received as in ERP system
9. UDID of this particular advance that was previously sent to ZATCA for approval
10. Advance Issue date in UTC format
11. Advance amounts (Net, VAT, and Gross) that was previously sent to ZATCA
12. VAT rate and currency specified during advance

It is crucial that the total advances adjusted in the invoice match the value provided in the XML sent to ZATCA, termed “cbc:PrepaidAmount” in ZATCAs glossary.

Key Checks by ZATCA

1. Ensure the invoice type is not adjusted in another invoice. Adjusted transaction can only be an invoice IRN number
2. VAT category is mandatory to be provided to inform if the advance was for standard,export, intercompany etc.
3. Sum of all the prepaid net amount (advance net amount) = total prepaid amount adjusted for the invoice (cbc:PrepaidAmount). 0.01 rounding off error is allowed.
4. Currency of the advance transactions adjusted should be same as currency of the invoice

It is vital that businesses adjust these advances in subsequent Sales Invoices or Direct Finance invoices. As per the ZATCA guidelines,VATaccrued in these advances must be promptly declared post-transaction. A strategic approach ensures businesses dont inadvertently pay double taxes: once for the advance and again for the invoice.

Practical Business Scenario:

Here there could be two scenarios

1. Adjust the advance/prepayment to match the invoice amount Basically, in the above scenario, IN23090003 value of 92,000 SAR will be adjusted with advance IN23090001 for 69,000 SAR and advance IN23090002 for 23,000 SAR. There will be a balance of 23,000 SAR in the advance IN23090002

This balance amount can be adjusted in the subsequent invoices again.

2. Adjust the advance/prepayment fully Basically, in the above scenario, IN23090003 value of 92,000 SAR will be adjusted with advance IN23090001 for 69,000 SAR and advance IN23090002 for 46,000 SAR. There will be lead to an excess VAT amount -23000 SAR declared with ZATCA

In this case, you will have to raise a Credit note for 23,000 SAR including VAT to match the VAT amount.

Navigating VAT declarations withZATCAcan be complex. But imagine a world where your ERP effortlessly aligns with ZATCAs rules, where integration is swift and security is top-notch. This is not a dream; many businesses today have found a partner that fits their unique needs and offers seamless integration. For those puzzled by VAT intricacies, we atAccqrateare ready to help.The goal? Smooth operations, strong security, and peak efficiency—a vision every forward-thinking business shares.