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Business Doctor: Dealing with a multitude of invoices

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SD writes: I have a number of contracts with clients with different invoicing terms. The range includes set-up fees, monthly subscriptions, one-off charges and perpetual licence fees. At what point do I recognise the income in my accounts and when is tax due on them?

It is common for a business to have different fee structures, writes Jon Dawson, partner at Kingston Smith LLP.

Often the invoicing of income does not match the pattern of events it relates to, so it is important to consider each element separately. The point at which you should recognise any revenue is dependent on when you have a right to receive it. This will be governed by what you have to do to earn it and your contractual arrangements.

Set-up fees and one-off charges are generally earned once the services or products have been provided. Income should be recognised in your accounts for the month to which it relates. For one-off perpetual licences, you have to estimate how long the service you are providing may last without significant upgrades or further fees.

The tax treatment will generally follow the accounting treatment, so you will pay tax on profits generated in the correct period. So it is vital to allocate invoices to the right months.

It is common to issue one invoice covering several fees. For example, you may invoice for setup and a full-year charge in advance. You need to consider each service separately and ensure, when you account for the income, you defer an amount to the right period. Your accounting software may handle this, but you can consider bespoke software.