Advance payments: the advance invoice and the final invoice

In short

When a customer pays before you deliver, VAT is due on the advance when you receive it. Issue a tax invoice for the advance within 14 days. When you deliver, issue the final invoice at full value, less the advance, and name the advance invoice. VAT on the two invoices together then adds up to VAT on the full price, charged once.

Why eInvoicing needs it

The VAT Law fixes the date of supply as the earliest of several events, and receiving payment is one of them (Article 25(7)). So an advance creates a tax point for the amount received. A tax invoice must follow within 14 days of that date (Article 67(1)).

The Ministry of Finance (MoF) Guidelines settle how this looks on an eInvoice (Appendix 5). A tax invoice is issued at the time the advance is received. The final invoice covers only the remaining balance, not the full value again, and refers to the advance invoice. Calculus shows each line at full value and deducts the advance as an allowance, so the taxable amount equals the balance and the link to the advance stays visible. The prepaid amount field may be left blank.

Calculus applies this shape:

• Advance invoice: a tax invoice (type 380) for the advance only. 5% on a local sale, or 0% (category Z) with the export reason on an export.
• Final invoice: a tax invoice (type 380) with each line at full value, reduced by an allowance "Advance recovered, invoice ADV-0012 of 2027-02-03". The advance invoice number and date go in the preceding invoice reference field.

The allowance keeps every amount positive, so VAT is only charged on the balance.

What good looks like

Al Noor Trading LLC sells machinery to Gulf Spice Imports FZE (Tax Registration Number, TRN, 100041283700003) for AED 40,000 plus VAT. Gulf Spice pays AED 10,000 plus VAT in advance on 3 February 2027. The machinery is delivered on 10 March 2027.

Advance invoice ADV-0012, 3 February 2027

Line	Amount (AED)
Advance for machinery, order PO-778	10,000.00
VAT 5%	500.00
Total	10,500.00

Final invoice INV-0140, 10 March 2027

Line	Amount (AED)
Machinery, full value	40,000.00
Less allowance: Advance recovered, invoice ADV-0012 of 2027-02-03	10,000.00
Taxable amount	30,000.00
VAT 5%	1,500.00
Total due	31,500.00

VAT charged in total: 500 + 1,500 = 2,000, which is 5% of 40,000.

Accounting entries

Date	Entry	Debit (AED)	Credit (AED)
3 Feb	Gulf Spice (customer)	10,500
	Advances received from customers		10,000
	Output VAT		500
3 Feb	Bank	10,500
	Gulf Spice (customer)		10,500
10 Mar	Gulf Spice (customer)	31,500
	Advances received from customers	10,000
	Sales		40,000
	Output VAT		1,500

How to fix it in Tally

1. When the advance is received, raise a Sales voucher for the advance amount only, posted to an "Advances received from customers" ledger with 5% VAT (or zero rated for an export). Use a voucher type such as "Advance Invoice" so these carry their own numbering.
2. Record the receipt with a Receipt voucher and, in the bill-wise details, use Agst Ref against the advance invoice.
3. On the final Sales voucher, enter the goods at full value. Add a line to the "Advances received from customers" ledger that reduces the taxable value by the advance, and write "Advance recovered, invoice ADV-0012 of 2027-02-03" in its narration.
4. Ask your Tally partner to export this as an allowance with its reason, not as a negative line, and to carry the advance invoice number and date as a preceding invoice reference.
5. Never raise a tax invoice from a proforma. Raise it from the receipt.

How to fix it in Excel or another system

On the final invoice, add an allowance row (amount positive, VAT category same as the line it reduces) and two columns:

Column	Format	Example
Allowance reason	Text	Advance recovered, invoice ADV-0012 of 2027-02-03
Preceding invoice number	Text	ADV-0012
Preceding invoice date	YYYY-MM-DD	2027-02-03

The allowance on a line is never more than the line itself. ERP users: ask your ERP partner to deduct advances as an allowance that names the advance invoice, not as a negative line.

Checklist

• A tax invoice is issued for every advance within 14 days of receipt
• No tax invoice is raised from a proforma
• Final invoice lines are at full value, reduced by "Advance recovered"
• Every final invoice names the advance invoice number and date
• VAT on advance plus final equals VAT on the full price

The law

• Federal Decree-Law No. 8 of 2017 on Value Added Tax (VAT Law), Article 25(7): date of supply is the date payment is received or the tax invoice is issued, if earlier. Article 67(1): tax invoice within 14 days of the date of supply. MoF PDF
• MoF UAE Electronic Invoicing Guidelines, Appendix 5, section 17.1: tax invoice at receipt of the advance; final invoice covers only the remaining balance and references the advance invoice; prepaid amount may be left blank. MoF PDF
• Peppol PINT AE: preceding invoice reference (IBG-03, IBT-025 and IBT-026) and invoice line allowance with reason (IBG-27). PINT AE specification