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How do I charge VAT for items that are not sold yet?
My business supplies sportswear and accessories, with one of our sales channels on a sale or return basis to gyms and yoga studios. We recently registered with the FTA [Federal Tax Authority] and want to know how to account for VAT on items not paid for by my clients until they are ultimately sold to their customer. It seems unfair to raise a tax invoice and demand immediate payment when I send stock to the gym, even though they will not pay for the goods until months later or possibly return the items and not pay at all. LL, Abu Dhabi
The sales model you describe is typically known as consignment, sale on approval, or sale or return. Under this arrangement the supplier will provide products to the buyer but the buyer is not obliged to pay until he has sold them to his customer, or he agrees to take ownership of them from the supplier.
Typically if the items remain unsold, the customer can return them to the supplier without payment. Customers like this arrangement because all the risk stays with the supplier. However, this type of sale creates some confusion from an accounting and VAT perspective.
Because the customer does not take legal ownership of the products until they are sold on, account for them as your stock until the final sale happens, even though they are not physically in your possession.