Share this content

Correctly Accounting for Supplier Discounts

How can I correctly account for a supplier settlement discount when no credit note is raised

Didn't find your answer?

Hi All,

I've tried searching around and can't really find an answer to my question. I'm having trouble accounting for supplier settlement discounts. I'll try and be brief and I appreciate any help. 

Say we are invoiced £10 ten times in a month most of this is at standard rates but some are zero-rated. I will get the monthly statement through and reconcile back to £100. When the payment is taken by direct debit at the end of the following month it is less than the amount, for example, £95. This £5 is a supplier discount that appears either on remittance advice from the supplier or on the back of the statement. My problem is no credit note is raised when this occurs and the invoices obviously add up to more than the £95 payment. I'm hesitant to just raise a credit note as the discount doesn't apply to any specific invoice and I don't want to get the VAT treatment wrong. 

I realize this is a pretty basic query but I've never come across it before. Thanks for the help in advance.

Replies (9)

Please login or register to join the discussion.

By johngroganjga
09th Jul 2019 13:37

When you enter the £95 payment you post £100 to the debit of the purchase ledger account and £50 to the credit of Discounts Received.

Thanks (1)
Replying to johngroganjga:
avatar
By WhichTyler
09th Jul 2019 13:28

And if the supplier is offering a prompt payment discount then they should be charging vat on the discounted prices (sometimes shownas a lower vat rate on the full price). this should sort out your concerns about VAT treatment

F

Thanks (1)
Replying to WhichTyler:
avatar
By paulwakefield1
09th Jul 2019 13:32

I thought the rules changed a couple of years ago and that the full VAT was now to be charged until such time as the discount was taken advantage of? But none of my clients offer any so I may be out of date.

Thanks (1)
Replying to paulwakefield1:
avatar
By WhichTyler
10th Jul 2019 13:08

You could be right, it's a while since I last dealt with it

sorry for confusion

Thanks (0)
Replying to WhichTyler:
avatar
By Wanderer
10th Jul 2019 13:27

Change with effect from 01/04/2015.

Thanks (0)
Replying to johngroganjga:
avatar
By Wanderer
10th Jul 2019 13:34

johngroganjga wrote:

When you enter the £95 payment you post £100 to the debit of the purchase ledger account and £50 to the credit of Discounts Received.

John, £5 not £50 and you actually have to adjust the VAT as well.
Thanks (0)
avatar
By paulwakefield1
09th Jul 2019 13:26

If the prompt payment discount has been applied against the statement amount with a mixture of VAT rates, then I would pro rata the VAT accordingly so, depending on your system,
Cr Bank
Dr Purchase ledger either payment amount+internal credit note or outstanding amount
Cr VAT element of discount pro rata on basis of zero and standard rated supplies
Cr Discount received

Thanks (1)
avatar
By St Bruno
10th Jul 2019 11:30

Why not enter a dummy credit note from the supplier, not forgetting to account for the VAT?

Thanks (0)
avatar
By Wanderer
10th Jul 2019 13:30

OP

HMRC explained their thoughts in Revenue and Customs Brief 49/2014 VAT: prompt payment discounts

http://taxnews.lexisnexis.co.uk/TaxNewsLive/Members/BreakingNewsFullText...

HMRC wrote:
Customers:

On receiving an invoice offering a PPD a VAT registered customer may recover the VAT charged, in accordance with VAT Regulation 29 of the VAT Regulations 1995.

As adjustments may take place in a VAT accounting period subsequent to the period in which the supply took place the method of adjustment needs to comply with Regulation 38 of the VAT Regulations 1995 (SI 1995/2518).

In practice this will mean:

a) if the customer pays the full price they record it in their records and no VAT adjustment is necessary.

b) if the customer pays the discounted price in accordance with the PPD terms on receipt of the invoice they may record the discounted price and VAT on this in their accounts and no subsequent VAT adjustment is necessary.

c) if the customer does not pay when the invoice is first issued, they must record the full price and VAT in their records as shown on the invoice. If they subsequently decide to take-up the PPD then:

if they have received an invoice setting out the PPD terms which states no credit note will be issued they must adjust the VAT in their records when payment is made. They should retain a document that shows the date and amount of payment (e.g. a bank statement) in addition to the invoice to evidence the reduction in consideration.
if the supplier’s invoice does not state that a credit note will not be issued, the customer must adjust the VAT they claim as input tax when the credit note is received. They must retain the credit note as proof of the reduction in consideration.

Thanks (0)
Share this content