Accounting for Interior Designers
The very nature of how an interior design business operates can often make the bookkeeping tricky, especially if your business is VAT registered. The purpose of this article is to highlight some of the fundamental processes that an interior design business should have in place, to ensure that the bookkeeping and VAT returns are accounted for accurately.
No two businesses are the same and what makes a business different can be what makes it successful. However, there should always be clarity and consistency in how any business deals with its financials. This is particularly relevant for your interior design business, as there are specific issues and potential pitfalls that are relevant to the industry which we feel is worth sharing.
As an interior designer you may charge your clients by way of design or consultancy fees, commissions or other project management fees based on the circumstances. You may also charge for procurement and sourcing or instead charge a small mark-up margin on discounted goods acquired from trade discount providers. However you charge, you should be aware of the VAT registration threshold (currently based on a turnover of £85k) and the new Making Tax Digital rules which could affect your business and cashflow and determine whether the goods you purchase for your clients are disbursements or recharges, as this will have a very real impact on your VAT position, which we discuss below.
Many interior design businesses will purchase materials such as furniture and fittings on behalf of their clients and effectively act as the “middle man” between the supplier and the client. The business will then create a disbursement invoice to charge onto the client for the full cost of the supplies. This type of arrangement is common, but can easily become an issue if there is no understanding of how the accounting should be treated, especially when dealing with VAT.
A disbursement arrangement must have the following features;
The client must have already chosen the materials they wish to purchase from the supplier before raising the purchase order to the supplier.
The purchase order and purchase account must be in the customer name and have their address and contact details, including the delivery details for the client where materials should be sent.
When the purchase invoice is sent by the supplier it must be addressed to the client.
Payment of the purchase invoice will often be made by the interior design business and a disbursement invoice will be created to send to the client.
The disbursement invoice must match exactly with the supplier invoice, ie with no mark-up and VAT is not charged. Equally, when the purchase is made by the interior design business no VAT can be reclaimed on the purchase invoice and it is not included in your turnover.
If the client is VAT registered themselves they will be able to reclaim any VAT that is charged.
A disbursement arrangement is effectively a cash transaction where the client is relying on the interior design business to deal with payment of the supplier account. The advantages of a disbursement arrangement are that the client will potentially get better credit terms, as the supplier may be more lenient when it comes to receiving payment from the interior designer, than if the client was to make payment directly to the supplier. The same would apply to trade discounts which would be passed on under this arrangement.
The interior design business may also keep a track of the order and ensure that the delivery of the materials is on time. The client will own the goods and ultimately the contract remains between the supplier and the client
Another arrangement involves the interior design business procuring materials on behalf of the client. A “recharged expense” arrangement exists when the client does not know what specific items have been purchased and an example may be when a general budget has been given to the interior design business to complete the project. In this instance there may be a mark-up or margin applied unless you choose you keep the transaction completely transparent with no profit.
A “recharged expense” has the following features;
The interior design business will procure the materials on behalf of the client, with the client not necessarily knowing or choosing specifically what is purchased.
Generally the interior design business will have been assigned a budget by the client to complete the job.
The supplier purchase order or purchase account will be in the name of the interior design business.
The sales invoice to the client will include the good and materials purchased for the project that need to be “recharged” and will include 20% VAT on all of the “recharged” expenses. If the interior design is VAT registered, it will show the costs net of VAT as well as the VAT if the transaction is transparent and if a mark-up is applied, then the value of VAT you charge on will be greater than what you have paid.
VAT must be charged by the interior designer regardless of whether the original purchase included VAT or not, (unless the interior designer is not VAT registered). This could lead to a client paying more than if they were invoiced directly.
The nature of running an interior design business can make the bookkeeping complex. I would advise any interior design business to move to a cloud bookkeeping software such as QuickBooks or Xero, if they have not yet done so already. Using a bookkeeping software will really help to systemise the bookkeeping process and ensure many of the difficulties that could arise around VAT, cash flow and profitability are minimised and regularly maintained. You will need to be using software like this if you fall under the new HMRC rules for Making Tax Digital.
Using a bookkeeping software will help when finalising and submitting VAT returns. The invoicing functionality is invaluable when it comes to accounting for VAT on sales, regardless of whether you are issuing “disbursement” invoices or “recharging” expenses to clients. A bookkeeping software will automatically pick up any expenses that you wish to allocate to a client invoice and, dependent on how this invoice is being treated, will automatically feed through to the VAT report ready for submission of the VAT return.
Bookkeeping softwares work off real time data from information pulled through from the business accounts (credit cards, savings accounts, current accounts) that are integrated with the software. This means that as long as the bookkeeping is up to date, the business will have a real-time picture of the cash available. Additionally, alerts can be set for when cash balances reach a certain level.
Knowing whether a particular project is returning a profit can be difficult to measure. Using a bookkeeping software allows expenses and sales invoices to be allocated to specific projects and clients. This functionality means that profitability can be tracked on a project by project basis so you can keep on top of budgets and cashflow.
FUSE is an independent Chartered Certified firm of accountants and tax advisors based in Highgate Village, North London. We provide a dynamic range of services to clients working in property, media, entertainment and professional services. Our clients vary in size from self employed sole traders, small enterprises and medium size businesses. We believe that comprehensive financial planning and sound business financial advice are the keys to growth and profitability.