Service plans allow customers to pay in advance or by instalments for scheduled vehicle servicing, giving them peace of mind while providing the business with upfront cash flow. Accurate accounting for these plans is essential to ensure that VAT is treated correctly and income is matched to the work performed. Service plans may be sold either by the service department (typically as an aftersales product) or by sales (often as a dealer option at the point of sale).
This guide explains the correct procedures for processing service plans, ensuring compliance with VAT regulations and internal accounting standards.
Why Is This Process Important?
Correct VAT Treatment: Service plans are subject to VAT at the point of sale. If not managed properly, there is a risk of accounting errors and non-compliance.
Accurate Financial Reporting: Ensures service plan revenue is recognised in the correct period and against the right nominal codes.
How to Process Service Plans
If Sold by Service Department
Raise a Job Card
Create a job card specifically for the service plan.
Add a Non-Labour line item for the service plan.
Ensure this non-labour line is coded to the correct nominal code for service plan sales (you may need to set this up if it does not exist).
If Sold by Sales Department
Sell as a Dealer Option
Add the service plan as a Dealer Option on the vehicle sale.
Ensure the dealer option is coded to the correct nominal code for service plan sales.
Processing
The dealer option process will ensure the sale is handled correctly within the accounts.
End-of-Month Accounting
At month-end, all values sitting in the sales side of the service plan nominal code must be journaled to a balance sheet nominal code (deferred income).
This moves the liability off the profit and loss and into a balance sheet account, as the service plan is effectively income received in advance.
VAT Considerations
VAT is accounted for at the point of sale (i.e., when the service plan is first invoiced to the customer).
There is no VAT on future transfers between the service plan balance sheet nominal and the sales ledger, as VAT has already been dealt with.
Processing the Customer Side
Create a Sales Ledger Account
Set up a sales ledger account for each customer’s service plan.
This account must be set as zero-rated for VAT (since VAT was collected at the point of sale).
Posting Receipts
When a payment is received (either in full or by instalment), post the receipt to the relevant sales ledger account.
The payment will sit as an unallocated amount, acting as a pot of cash to be used for future invoices.
When the Customer Visits the Workshop
The workshop should bill the job to the customer’s service plan account.
Allocating the Invoice
Accounts should then allocate the invoice against the unallocated cash (the service plan “pot”) by posting a zero-value receipt.
This clears down the balance as services are rendered.
Common Scenarios and Tips
If a customer cancels a service plan:
Any unearned income should be removed from the balance sheet nominal and VAT adjusted if a refund is issued.Reconciliation:
Regularly reconcile the service plan balance sheet nominal code to ensure all “pots” match the unallocated amounts on customer sales ledgers.
Frequently Asked Questions
Q: What happens if I invoice a service plan to the wrong nominal code?
A: Journal corrections must be processed to move the value to the correct code. It is important to get this right at the time of sale to minimise month-end adjustments.
Q: Why is the sales ledger account zero-rated?
A: Because VAT has already been collected and accounted for at the point of sale. Any subsequent entries on this account are movements of already-taxed funds.
Q: What if the customer does not use all of their service plan?
A: Remaining funds should be reviewed at expiry or cancellation, and any unearned income can be refunded if necessary, with VAT adjustments.
Was this article helpful?
That’s Great!
Thank you for your feedback
Sorry! We couldn't be helpful
Thank you for your feedback
Feedback sent
We appreciate your effort and will try to fix the article