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Tax Treatment of Customer Rewards Programme

Tax Treatment of Customer Rewards Programme

Hi,

I run an online store.

Our customers get enrolled in our rewards scheme when they buy from us.

For example, a customer makes a purchase for £100, they then have an account credit for 5% (£5) to use against future purchases etc.
So at any given time we have a liability for the sum of all these debts.

However, not all customers become repeat customers, and those that do often buy much more. Up to now we've been ignoring this liability on our accounts. 

But now it's over 50k, and I'm wondering if I should treat it as a liability, and so use it to reduce our profits and Corporation tax.

Is this allowable? Any suggestions how it's accounted for and what is the correct procedure in this case.

Many Thanks

Jake

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avatar
04th Mar 2016 20:44

It's not a liability
If they use it, just treat it as a discount at the point of purchase

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07th Mar 2016 10:32

Because there's a not insignificant chance you won't end up paying it you can't treat it as a liability and therefore can't recognise it until it becomes definite, ie when the customer makes another purchase. I agree it should be treated as a discount when the purchase is made and not at any point before.

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By DJKL
07th Mar 2016 10:46

Surely akin to warranties

Surely  these are akin to warranties  re accounting treatment and accordingly some estimated provision of likely usage ought to be made within the accounts. Over time the business ought to  be able to say evaluate the percentage useage of such "discounts" and apply said percentage to those "issued/ earned".

No mention is made of whether they have a lifespan or are they perpetual in nature, certainly if I were the OP I would consider restricting use to a set period post creation.

Given the non specific nature of such an adjustment I am not sure corporation tax relief is going to be possible for such a provision, but irrespective a suitable provision maybe ought to be introduced , even if currently not material, to avoid in future a large adjustment. (If perpetuals more issued greater claims)

So if £50,000 of such discounts earned and history suggesting that say 8% of customers make use of their discount , a £4,000 adjustment might be on point.

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avatar
07th Mar 2016 13:49

Surely not!!

DJKL wrote:

So if £50,000 of such discounts earned and history suggesting that say 8% of customers make use of their discount , a £4,000 adjustment might be on point.

There is absolutely no liability existing at the balance sheet date!

 

If they were going to call on a warranty, there would be a cost to the person giving the warranty. But the only way they can access this discount is by buying more stuff (i.e. an inflow of economic benefit). And the vendor can increase (or even decrease) his list price if he wants to in future.

And please don't say "on point", it is too easily misunderstood. The word is "appropriate" or "correct"

"A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits."

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By DJKL
07th Mar 2016 14:59

Sat on a wall

WhichTyler wrote:

DJKL wrote:

So if £50,000 of such discounts earned and history suggesting that say 8% of customers make use of their discount , a £4,000 adjustment might be on point.

There is absolutely no liability existing at the balance sheet date!

 

If they were going to call on a warranty, there would be a cost to the person giving the warranty. But the only way they can access this discount is by buying more stuff (i.e. an inflow of economic benefit). And the vendor can increase (or even decrease) his list price if he wants to in future.

And please don't say "on point", it is too easily misunderstood. The word is "appropriate" or "correct"

"A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits."

I was not considering it as a warranty but more considering the sort of thought process that may arise when dealing with thinks like warranties They are contingent but using past history can helps as a guide to the future re quantification.

The OP should say consider FRS102 section 21 and consider whether on point.  They do not state under what FRS/IAS they report so may have to do further reading.

https://www.frc.org.uk/Our-Work/Publications/Accounting-and-Reporting-Po...

The narrative at 21.7 is worth a read re provisions with large populations.

21.7 An entity shall measure a provision at the best estimate of the amount required to settle the obligation at the reporting date. The best estimate is the amount an entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time. (a) When the provision involves a large population of items, the estimate of the amount reflects the weighting of all possible outcomes by their associated probabilities. The provision will therefore be different depending on whether the probability of a loss of a given amount is, for example, 60 per cent or 90 per cent. Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the mid-point of the range is used. (b) When the provision arises from a single obligation, the individual most likely outcome may be the best estimate of the amount required to settle the obligation. However, even in such a case, the entity considers other possible outcomes. When other possible outcomes are either mostly higher or mostly lower than the most likely outcome, the best estimate will be a higher or lower amount.
When the effect of the time value of money is material, the amount of a provision shall be the present value of the amount expected to be required to settle the obligation. The discount rate (or rates) shall be a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money and risks specific to the liability. The risks specific to the liability shall be reflected either in the discount rate or in the estimation of the amounts required to settle the obligation, but not both.

These days I am pretty rusty re such adjustments, I think the last time I needed to more seriously consider the issue was during my apprenticeship, but it would appear that provision, or at least contingent note, might be prudent re revenue recognition. Of course the OP makes no comment re margin and 5% might be a significant proportion of gross profit ,though given advised  limited customer use of the discount that is probably not likely.

I was not aware Accounting Web had the service of external editors for posts made, is this a position to which you were appointed or is it merely a self appointed role?  For information ' when I use a word it means just what I choose it to mean — neither more nor less"

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avatar
07th Mar 2016 14:22

OP here.

We don't have a time limit for redemption of credit, but very few people who have a unused credit beyond 2 years come back and use it.

So I'll continue to just use it as a discount at time of purchase.

I just wanted to see what the consensus is.

Thanks.

 

 

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avatar
09th Mar 2016 22:55

Falling at the first hurdle
”21.7 An entity shall measure a provision at the best estimate of the amount required to settle the obligation at the reporting date. "

What obligation is there at the bs date? You said "surely these are akin to warranties", but I think they are surely not. If they were, then the method you refer to would be right. But they aren't.

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