A double payment or too much received: how to book it

An overpayment is a debt, not turnover

Legally this is called an undue payment: money was paid without an obligation behind it. The client can reclaim that amount and you are obliged to return it. For your records that means one thing: the amount is not income. You book it as a debt to that client, for example to an account for amounts received in excess, or as a negative outstanding balance with that debtor.

It is tempting to simply match the payment against the next open invoice, even one from another client or not yet sent. Do not do that. Your debtor overview no longer adds up, and in an audit it can no longer be traced which invoice was or was not paid. Leave the payment where it belongs, with the client who made it.

Refunding or offsetting

The cleanest solution is to refund, and preferably fast. Transfer the amount back to the account it came from, with a description such as refund of amount received in excess, plus the invoice number. In your books you match that debit against the debt you recorded, and the matter is closed. No credit note is needed, because there is no invoice that has to be reduced.

Offsetting against a future invoice is also possible, but only if the client agrees and a next assignment really follows. Record that in writing, even if only by email. On the next invoice you simply charge the full amount with VAT, and the client pays the difference. In your books you then match the open invoice against the debt and the new payment together.

1. Establish where the difference comes from: compare the amount received with the invoice and the payment description.
2. Let the client know, even if they have not noticed themselves. That is cheap goodwill.
3. Book the amount as a debt, not as turnover, so your result and your VAT stay clean.
4. Refund to the same account, or record an agreement to offset in writing.
5. At your next VAT return, check that the amount has not slipped into your turnover.

What it does to your VAT

VAT is due on the consideration for a supply of goods or services. With a double payment there is no second service, so there is no second charge of VAT either. The amount therefore does not belong in box 1a or 1b of your return. That sounds obvious, but it goes wrong precisely when you let the payment land on a turnover account in your package: the software will then simply include it.

It is different when you reduce an amount you did invoice, for instance because you give a discount or part of the work did not go ahead. Then you lower the consideration, you do need a credit note, and you correct the VAT in the period in which you repay the amount. The same principle applies to returns, see booking returns and refunds.

The client does not ask for it back. What then?

Sometimes a client does not notice and does not respond to your message either. The amount then stays on your balance sheet as a debt. You may not simply take it as profit because it happens to be left there: the client's claim only expires after a number of years. At the very least make one demonstrable attempt to refund it and keep that email, because it shows you did not intend to keep it.

If the claim eventually expires and the client can no longer be reached, the debt is released to your profit and you pay tax on it that year. Still no VAT is due, because there is still no supply. Put such a release in your year-end checklist, so old liability items do not linger on your balance sheet for years.

• Keep your attempt to refund: an email with a date is enough.
• Keep the debt under the client's name rather than on a collective account, so you can find it later.
• Review your balance sheet annually for items sitting there longer than a year; see reading your balance sheet.
• If a client pays too little, that is not a debt but an outstanding receivable; see when a client does not pay.

Frequently asked questions