Service businesses

Service businesses sell something intangible — knowledge, skills, or labor — for example, consultants, spas, or maintenance services. The area that needs special attention is that the point of accounting revenue recognition may not match the point VAT liability arises (which the law sets as the date payment is received, unless a tax invoice is issued or the service begins first). Relying on the payment date alone can affect both accounting and tax as follows:

• Recognizing accounting revenue in the wrong period affects internal management of revenue and expenses, reducing the accuracy of your back-office reporting.
• Remitting VAT in the wrong period can result in penalties.

1. When should a service business recognize revenue — at the time payment is received, or when the service is completed?
2. How should costs incurred be recorded — are they matched to the services provided to each client?
3. Is withholding tax on payments to freelancers or subcontractors deducted at the correct rate?
4. Is income from overseas clients subject to VAT?
5. When does your service business need to register for VAT?