The short answer
- A deposit invoice (also called an advance or down-payment invoice) asks for, or records, part of the agreed price before the work is done or the goods are delivered.
- UK: if you're VAT-registered, a deposit that's part-payment for a supply creates a tax point when you receive it or invoice it, whichever comes first. VAT is due on the deposit then, not when the job ends. Refundable security deposits are different: no VAT.
- US: there's no VAT. For income tax, a cash-basis freelancer reports the deposit when it's received; accrual-basis businesses may be able to defer part of it to the next year.
- The final invoice should show the full price, then subtract each deposit with its invoice number and date, and ask only for the balance.
- Use the same numbering sequence for deposit invoices and final invoices, and never delete one: cancel with a credit note.
Deposit, retainer or security deposit?
The word "deposit" covers three different things, and they're taxed and invoiced differently.
| Type | What it is | Part of the price? | Invoice it? |
|---|---|---|---|
| Deposit / advance payment | First instalment of an agreed price | Yes | Yes, as a deposit invoice |
| Retainer | Money paid in advance, drawn down as you work (common for lawyers, consultants) | Usually, as work is billed | Yes, then show each draw-down |
| Security (damage) deposit | Money held against loss or damage, returned if all goes well | No | No sales invoice; give a receipt |
Deposit / advance payment
What it isFirst instalment of an agreed price
Part of the price?Yes
Invoice it?Yes, as a deposit invoice
Retainer
What it isMoney paid in advance, drawn down as you work (common for lawyers, consultants)
Part of the price?Usually, as work is billed
Invoice it?Yes, then show each draw-down
Security (damage) deposit
What it isMoney held against loss or damage, returned if all goes well
Part of the price?No
Invoice it?No sales invoice; give a receipt
The rest of this guide is about the first kind: a part-payment of the agreed price. If you still need to agree the price, send a quote first (our guide to writing a quote covers how to set out deposit terms). If a client needs a document to arrange funds or import paperwork before ordering, that's a proforma invoice, which isn't a VAT invoice.
When to send a deposit invoice
Send it as soon as the client has accepted the quote and you want the money, or immediately after an up-front payment arrives if the client paid straight from the quote. Three reasons to do it properly rather than just sending bank details in a message:
- It gives the client a document to pay against. Many accounts teams won't pay without an invoice number.
- It fixes the paper trail. Every payment you receive matches an invoice, which makes your year-end records, and any dispute, much simpler.
- For VAT-registered businesses in the UK, it's often required. A business customer needs a VAT invoice to reclaim the VAT on what they've paid.
UK: VAT on deposits
HMRC's rules on advance payments are clear. When a customer pays a deposit that's part of the price, "the tax point will be either the date you issue a VAT invoice for the advance payment, or the date you receive the advance payment, whichever happens first". You account for VAT on the deposit in the VAT return covering that date. When the balance is paid or invoiced before delivery, it creates a further tax point for the balance; otherwise the balance follows the normal rules.
Two special cases:
- Returnable deposits. If the deposit is refunded in full when hired goods come back safely, or kept only to compensate you for loss or damage, it isn't payment for a supply and you don't account for VAT on it.
- Forfeited deposits. HMRC says that if you keep a deposit because the customer decides not to take up the goods or service, "VAT remains due on the money you have received".
A VAT invoice is normally issued within 30 days of the tax point. If you use the Cash Accounting Scheme, you account for VAT when you're paid anyway, so a deposit's VAT goes in the return for the period in which the money arrived.
If you're not VAT-registered, none of this applies: your deposit invoice simply shows the amount with no VAT. Our guide to invoicing as a sole trader covers the £90,000 registration threshold.
US: how deposits are treated
The US has no VAT, and no federal law saying what a deposit invoice must contain. What matters is how you record the money:
- Cash method (which most small businesses are allowed to use): you include income in the year you actually or constructively receive it. A $2,500 deposit received on December 20 is income for that year, even if the project finishes in February.
- Accrual method: IRS Publication 538 says you generally report an advance payment in the year you receive it, but you can elect to postpone including part of it until the next year, when conditions are met. You can't postpone it beyond that next tax year.
- Sales tax: whether a deposit is taxable, and when, depends on your state and on what you sell. Check your state revenue department's guidance before you set up your invoice template.
On the client side, a deposit invoice gives their bookkeeper something to file. For contracts with state freelancer protections, such as New York's Freelance Isn't Free Act, a written record of what's been paid and what remains is exactly what you'd want if a dispute arose.
Worked example: deposit and final invoice (UK, with VAT)
Priya runs a small kitchen-fitting business in Leeds and is VAT-registered. A café accepts her quote on 2 June 2026: £6,000 plus VAT at 20% = £7,200. Terms: 25% deposit on acceptance, balance on completion.
- Deposit invoice INV-0412 (2 June): 25% of the price, £1,500 + £300 VAT = £1,800. Paid on 4 June. The VAT invoice was issued first, so 2 June is the tax point for the £300, which goes in the VAT return covering June.
- Final invoice INV-0436 (10 September, on completion): full price £7,200, less the deposit, balance £5,400 (£4,500 + £900 VAT).
| Description | Qty | Unit price | Total |
|---|---|---|---|
| Supply and fit café kitchen, as quote Q-0391 | 1 | £6,000.00 | £6,000.00 |
VAT on this invoice: £900.00 (VAT of £300.00 was charged on deposit invoice INV-0412). Payment within 30 days by bank transfer. Late payments may incur statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998.
- The full price is shown, so the client can check it against the quote.
- The deposit is subtracted with its own invoice number and date.
Check: £1,800 + £5,400 = £7,200, and £300 + £900 = £1,200 of VAT in total. The café can reclaim £300 in its return covering June and £900 in the one covering September; Priya declares the same amounts in her matching periods.
A US version is simpler. Marcus, a web designer in Austin, quotes $5,000 with a 50% deposit. Deposit invoice: $2,500. Final invoice: total $5,000, less deposit (invoice 1027, June 3) $2,500, balance due $2,500. No sales tax is shown in this example; whether any applies depends on the state and the service.
Common mistakes
- Invoicing only the balance. A final invoice that says "$2,500" hides the real price and makes the deposit invisible. Show the total, then the deduction.
- A separate numbering series for deposits. "DEP-001" alongside "INV-0412" makes gaps and duplicates easy. One sequence for all invoices.
- Charging VAT on the full price again. VAT on the final invoice is VAT on the balance only; the deposit's VAT was already charged.
- Treating a damage deposit as income. Refundable security money isn't a sale. Record it separately and return it, or keep it only for actual loss or damage.
- Deleting a deposit invoice when a job is cancelled. If you refund the deposit, issue a credit note that references the deposit invoice.
Draft it from your phone
Northside Coffee finished today, make the final invoice for quote Q-0391 and take off the £1,800 deposit
Ready: invoice INV-0436 for Northside Coffee Ltd, £7,200.00 total, deposit INV-0412 of £1,800.00 deducted, balance £5,400.00, due 10 October. Save it?
Your assistant drafts the invoice; you check it and confirm.
Try Binome360 for freeIn Binome360 you create quotes and invoices by typing or speaking one sentence. Numbering is automatic for each document type, your business details and legal notes sit in the footer, and an accepted quote becomes an invoice in one tap. You share a link the client can open and download as a PDF, mark the invoice as paid when the money arrives, and see late invoices flagged with a polite reminder ready to send. Check the deposit line before you confirm. Binome360 doesn't take payments or connect to your bank, and it isn't a certified e-invoicing platform. To try an invoice layout first, the free invoice generator needs no sign-up.
Frequently asked questions
Is a deposit invoice a real invoice?
Yes. It records a sale (or part of one) and takes a number in your normal invoice sequence. In the UK, a VAT-registered business issuing one to a business customer should make it a full VAT invoice so the customer can reclaim the VAT.
How much deposit should I ask for?
There's no legal percentage for business-to-business work: it's a negotiation. A sensible starting point is to cover what you spend before the job starts, such as materials bought for that client or time you turn other work away for. Put the amount and when it's due in the quote, so the deposit invoice simply follows what was agreed.
What if the client cancels after paying a deposit?
Follow your written terms. If you refund, issue a credit note against the deposit invoice. If your terms let you keep it, in the UK HMRC says VAT remains due on a deposit kept because the customer didn't take up the goods or service. With consumers, the Competition and Markets Authority's guidance on the Consumer Rights Act 2015 says non-refundable deposits should usually be only a small percentage of the price, and money kept on cancellation should reflect your actual loss, so a large "non-refundable" deposit may be unenforceable.
Do I charge VAT on a deposit if I use the Cash Accounting Scheme?
Yes, the client still pays VAT on the deposit, and your invoice shows it at the normal rate. What changes is timing on your side: under cash accounting, you account for VAT when you're paid, so the deposit's VAT goes in the return for the period in which the money arrived.
In short
Invoice deposits as soon as they're agreed or paid, in your normal numbering sequence, with VAT (in the UK) accounted for when the deposit arrives or is invoiced. The final invoice shows the full price, subtracts every deposit by invoice number and asks for the rest. First step: add a "deposit: X% on acceptance" line to your quote template so the deposit invoice writes itself.
Sources
- GOV.UK, "VAT: instalments, deposits, credit sales" (advance payments, returnable and forfeit deposits): gov.uk/guidance/vat-instalments-deposits-credit-sales.
- HMRC, "VAT guide (VAT Notice 700)", sections 14 (tax points) and 16 (VAT invoices, 30-day rule): gov.uk/guidance/vat-guide-notice-700.
- HMRC internal manual VATTOS5120, "Actual tax points: payments: deposits and pre-payments": gov.uk/hmrc-internal-manuals/vat-time-of-supply/vattos5120.
- HMRC, "Cash Accounting Scheme (VAT Notice 731)": gov.uk/guidance/vat-cash-accounting-scheme-notice-731.
- Competition and Markets Authority, "Unfair contract terms (CMA37)" (deposits, advance payments and cancellation charges): gov.uk/government/publications/unfair-contract-terms-cma37.
- IRS, Publication 538, "Accounting Periods and Methods" (cash method, advance payments): irs.gov/publications/p538.
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