What is Advance Payments?
Advance payments are amounts paid to suppliers, contractors, or service providers before the related goods or services have been delivered or performed. They are recognised as an asset until the obligation is fulfilled.
How It Works
- Identify the advance in the contract and approve the payment release.
- Record the payment as a prepayment or advance to supplier (an asset).
- Apply VAT rules — output VAT may be triggered for the supplier at receipt.
- Recognise expense or inventory in stages as goods or services are received.
- Reconcile the advance balance until it is fully offset.
Saudi Context
Under Saudi VAT, an advance payment received by a supplier is generally a tax point, triggering output VAT and the requirement to issue a VAT invoice for the advance. ZATCA expects the buyer’s books to reflect the same treatment for input VAT recovery.
Example
A contractor receives a SAR 200,000 advance from a client. The client records it as an advance to contractor (asset). VAT of SAR 30,000 is charged by the contractor on the advance and recoverable by the client.