Accounting for Direct Debit payments made by Parish Councils (Income and Expense)

Question

The Parish Council chooses to report accounts on an Income and Expense basis.

A few regular bills (e.g. mobile phone) are paid by direct debit.  The invoices have a date and tax point in one month (e.g. rental and calls for March) but the direct debit is not taken by the supplier until sometime the following month (bank accounted debited in April for the March Bill which is in the next financial year)

I would expect to make an adjustment in the closing year showing the invoice received in March as a Creditor and include it in our VAT return.  That entry then reconciles to the bank account in April when payment is actually made.

The auditor is now saying that bills paid by direct debit should only be entered into the accounts on the data payment is taken by the supplier which effectively puts the expense into the next financial year.

To my mind this advice goes against GAAP for Income and Expense reporting   
Does the group have any guidance on which method is correct for a Parish Council?

Answer 1

I would agree with the auditor. An Invoice is a dated request for payment and it will stipulate how long you have to make the payment. The actual date a transaction occurs is what should be recorded, otherwise the balance for any given day  will not match that shown in the councils account or accounts. See https://www.legislation.gov.uk/uksi/2015/234/part/4/made

Comments

Thanks, I am familiar with the legislation and the choice for smaller councils of reporting on a Receipts and Payments or Income and Expense basis.  My question relates to the handling of payments by variable direct debits on an Income and Expense basis where the invoice date/tax point is earlier than the processing of the VDD payment.  I have expanded on the point by comment on the second reply to this thread.

Answer 2

Council accounting is different from company accounts. Councils with income and expenditure under £200k can report on a receipts and payments basis where transactions are recorded when the payment is made. Only larger councils use the income and expenditure basis. So, it depends!

Comments

Thanks. In our case we report on an Income and expense basis.  I am beginning to think that the handling of Direct Debits depends on whether they are fixed or variable.
Fixed DDs tend to be monthly payments which build up a balance on account (e.g. electricity), and reconciled to actual cost quarterly or annually on reciept of the statement/invoice.  I agree that the monthly payments should be entered on the date the payment is taken from the bank.

My question relates to variable DD where an invoice is received with date/tax point and paid by direct debit.  The date that the direct debit is taken is under the control of the supplier and occurs sometime later, sometimes in the next financial year.    My feeling is that in this case the expense should be recorded by invoice date/tax point for VAT purposes, not the date when payment is taken by the supplier.
To my mind the variable DD is an automated alternative to an invoice paid by cheque.  The expense is recorded according to invoice date, not date of presentation of the cheque.

Any other thoughts on this one would be most welcome.