Advance invoices - how do they help save money and apply VAT correctly?

For companies and self-employed persons, advance invoices are a way to receive prepayment before delivering goods or providing services, improve cash flow and, as a VAT payer, declare the tax only when the advance payment has actually been received.

If you carry out economic activity and need to understand when VAT liabilities arise, when a final invoice must be issued and how these transactions should be correctly recorded in accounting and everyday payments, in this article you will find a short and practical explanation - what an advance invoice is, what actions must be taken after receiving an advance payment, when to issue a final invoice, why advance invoices reduce the risk of non-payment and simplify record keeping, as well as how to manage all of this conveniently in pats.lv

What is an advance invoice?

An advance invoice is a document that a company or self-employed person issues before delivering goods or providing a service in order to receive full or partial prepayment; it is a prepayment request, not the final payment document.

An advance invoice usually records the transaction terms, prices and deadlines, and includes estimated facts and figures about what the client will need to pay for.

It allows you to:

• receive money before starting work;
• finance the fulfillment of the order;
• reduce the risk of non-payment and receive an additional guarantee that the client is ready to pay for the product or service;
• postpone VAT payment until the moment when the client actually makes the payment.

When do VAT liabilities arise?

It is important to know that issuing an advance invoice by itself does not yet create an obligation to pay VAT.

VAT liabilities arise at the moment when the client pays the advance.

This means:

• if the client has not paid yet - VAT does not need to be declared;
• if only part of the advance has been received - VAT is declared only on the received amount;
• if the full advance has been paid - VAT is declared on the full received amount.

This allows the entrepreneur not to cover VAT from their own working capital.

Example

Let us assume that the value of the service is:

• Amount excluding VAT - 1 000 EUR
• VAT (21%) - 210 EUR
• Total - 1 210 EUR

Before starting work, an advance invoice is issued for 1 210 EUR.

As long as the client has not paid and the service has not yet been provided, VAT liabilities do not arise.

When the client pays the advance invoice, the person carrying out economic activity declares 210 EUR in VAT. Since the money has already been received, VAT does not need to be paid from the company’s own funds.

If the client pays only a 50% advance, VAT is calculated only on the received part.

When should the final invoice be issued?

After the delivery of goods or provision of a service, the company issues a final tax invoice.

The final invoice states:

• the total transaction amount;
• the total VAT;
• the received advance;
• the remaining amount payable.

If the client has paid the advance in full, the remaining balance on the final invoice may be 0 EUR.

However, if only part of the advance has been received, the remaining amount is shown on the final invoice. VAT on the already received advance is not calculated again.

Example with a partial advance

The total transaction amount is 1 210 EUR, including 210 EUR VAT.

Before starting work, the client pays a 50% advance - 605 EUR, including VAT of 105 EUR.

After the service has been completed, the final invoice states:

• Total amount - 1 210 EUR
• Received advance - 605 EUR
• Remaining amount payable - 605 EUR, including VAT of 105 EUR

This way, VAT is not calculated twice on the same part of the transaction.

Why use advance invoices?

More convenient cash flow - By receiving prepayment, the company can cover materials, delivery and other costs before the work is completed.

Lower risk of non-payment - Prepayment reduces the chance that the client will delay payment or not pay at all, and gives a clearer guarantee of the client’s serious intention to make the payment.

VAT does not need to be financed from your own funds - VAT is usually declared only after receiving the advance payment, not at the moment the invoice is issued.

More convenient accounting - By using advance invoices, it is easier to control prepayments and final payments.

New in pats.lv - Advance invoices

Now it is also possible to issue advance invoices in pats.lv.

After the client’s payment, you can simply prepare the final invoice in the system, where the received advance is automatically taken into account.

This means:

• more transparent payment records;
• less manual work;
• lower risk of errors;
• more convenient VAT accounting.

Important to know

An advance invoice is effective only if it is issued before the delivery of goods or provision of a service.

If the transaction has already been completed, the VAT application procedure cannot be changed only because the document is called an advance invoice.

For certain transactions, including international trade, construction services or special VAT regimes, VAT application rules may differ, so please assess the terms of the specific transaction or, if necessary, consult a specialist.

Summary

An advance invoice is a useful tool for every company and self-employed person because it helps to:

• improve cash flow;
• reduce the risk of non-payment;
• avoid making VAT payments from your own funds;
• simplify accounting records;
• organize payments with clients transparently.

With the new pats.lv “Advance invoice” feature, you can issue an advance invoice in one place, track its payment and then prepare the final invoice, making the entire payment process faster and more convenient.

Note. This article provides general information. In certain situations, the VAT application procedure may differ, so in case of uncertainty, it is recommended to consult an accountant or the State Revenue Service.