VinceH wrote:

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Hi John,

I sort of agree with Joanne; based on your initial description, this sounds 'odd' and I'm trying to piece it together in a way that makes sense. My best guess as to the sequence of events is:

1. Supplier has raised invoices for whatever your client has purchased.
2. Supplier has factored those invoices to receive their 80%(?) advance.
3. Your client hasn't paid by the due date according to their credit terms.
4. Supplier has credited the original invoices, and repaid their 80% to the factoring company.
5. Supplier has raised new invoices, initiating a new credit period. (Presumably factoring and getting their 80% again).

(You refer to the new invoices being for the outstanding amount - so possibly you mean your client has paid something, and the credits/advance repayment/new invoices are based on the balance.)

In which case, it's definitely a cashflow 'workaround' - I wouldn't call it a fiddle, per se, because (if my interpretation is correct), the supplier has done it to provide your client with more time to pay to alleviate a cashflow problem at that end. (ICBW, Joanne, but I think your guess is that the supplier has done this to get more cash out of the factoring company?)

I hope the supplier is correctly accounting for the VAT in the right quarter (and, depending on when their year end is, that their turnover isn't being understated).

I'd say the basic answer is that if the supplier has credited the outstanding balance, they need to issue those credits to your client, and those credits should be entered in their accounts as credits, along with the new invoices. Subject to ensuring everything's above board in terms of tax points etc.

I think.

If I understand you correctly.

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 Spot on Vince, apart from point 4.  My understanding is that the supplier has paid the factoring company the outstanding amount, and that the new invoices are so the supplier gets his money back fairly quickly.

Hi John,

I think this quarter makes most sense, assuming that's the date on the new one(s).

In fact, based on what you've said so far, I'd be inclined to post the credit(s)** as the same date as the new invoice(s), but obviously matched against the older outstanding balance. That way, the actual charge in the VAT quarter (and on the P&L) remains when it should be - in terms of the VAT return and P&L, the charge on the new invoices is cancelled out by the credits.

** TBH, I'd be inclined to either write a detailed explanation of what this is all about on the new invoices if the detail shown on them doesn't (which it probably doesn't based on experience of people 'doing deals' for convenience etc - though nothing quite like this one), or I'd create dummy internal credits with the necessary explanation on. To create a paper (or PDF) record.

I'd probably also make sure the supplier was aware of my 1eet ski11z in this field, just in case their own accounts get messy and they need a bit of help sorting it. ;)

(As I said, this would be so easy to mess up on their side - the most obvious mistake that springs to mind is that because they've 'paid' the original balance rather than credit it, then raised new invoices, they could end up showing more turnover than they should, and therefore paying more VAT etc.)

Leger wrote:

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Hi Joanne 

I'm at the clients at the end of the week so Ill look into it properly then but from what I can ascertain the original invoices are March with 90 days credit.  That is the January - March VAT quarter and year end is also March.   New invoices issued July 90 days credit again. Supplier paid factoring co in May but only raised new invoices in July.     What date has it raised the credit notes at?   They have produced credit notes have they? 

Supplier has done it for goodwill purposes and presumably to either avoid a black mark with the factoring company or having to repay it back anyway and then having to wait for my client to pay and possibly not being able to extend further credit.  I know not looking at this from the supplier point of view, but I dont get how this would not get the supplier a black mark with the factoring company if the factoring company are actually doing their job properly  - ie questioning why credit notes are being issued so long down the line?  With also a check being done on the customer being supplied to and the inherent problems with a repayment/obvious credit issues then they should be marking that account as not being allowable for advances anyway.  But as I say thats not your issue. Im just pondering on the whole bizzare-ness of the situation

Both businesses gain because the supplier gets their money a lot quicker I dont get why they would get paid any quicker. Unless of course they are only doing it because your client has said thats the only way they will pay.  Why out of interest have they not paid this supplier when its so very much overdue?  and my client gets extended time to pay and avoids a black mark on her credit rating.  Isnt this then misleading other potential suppliers/users of their financials?  Mind you we dont know the year end date so perhaps not.   It just smells fishy!

What trouble do you potentially see and what VAT issues would arise?  From what I can see no one loses out apart from possibly the supplier who ends up paying an extra 20% VAT with no stock sold to offset it. ???  I suspect not as they will no doubt have issued internal/dummy invoices. Unless they are completely gormless and then deserve all they get when found out.

That said I do think the supplier has dropped a right spherical in the way they've done this.

 

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Purchase invoices are over 3months old so the input tax needs to be repaid to HMRC from the earlier period.

Credit notes would need to be dated at the same time as the invoices issued ie now (July) - so input and output will cancel each other out.

Cheshire wrote:

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Leger wrote:

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What date has it raised the credit notes at?   They have produced credit notes have they? 

Credit notes haven't been issued as far as I'm aware.  You have highlighted a real potential downside to that later in the thread.

I know not looking at this from the supplier point of view, but I dont get how this would not get the supplier a black mark with the factoring company if the factoring company are actually doing their job properly  - ie questioning why credit notes are being issued so long down the line?  With also a check being done on the customer being supplied to and the inherent problems with a repayment/obvious credit issues then they should be marking that account as not being allowable for advances anyway.  But as I say thats not your issue. Im just pondering on the whole bizzare-ness of the situation

My understanding is that the Supplier has repaid the broker so that the client's account is clear. See last paragraph though.

Both businesses gain because the supplier gets their money a lot quicker I dont get why they would get paid any quicker. Unless of course they are only doing it because your client has said thats the only way they will pay.  Why out of interest have they not paid this supplier when its so very much overdue?  

The supplier offered this to the client as the 3 months became due. The client has cashflow issues as she has bought a hell of a lot of stock but revenue has gone down slightly.  That's one of the area's I'll be looking at this next week as she has overstretched herself and is now panicking. If the supplier hadn't done it then the invoices become overdue, the supplier has to repay the broker then wait for payment from the client. No further credit so the client can't order more stock so the supplier loses future sales. 

Isnt this then misleading other potential suppliers/users of their financials?  Mind you we dont know the year end date so perhaps not.   It just smells fishy!

How exactly?  Client purchases stock in March, year end is March.  Supplier is a creditor on the balance sheet. Accounts correct

Client gets new invoices but they are offset by internal credit note.  Clients pays bill say in October and purchase ledger clear.  Accounts correct in March 2020.  

          Purchase invoices are over 3months old so the input tax needs to be repaid to HMRC from the earlier period.   

          I appreciate that your VAT knowledge is far superior to mine but my understanding is that repayment becomes due 6 months after the invoice was due for repayment, so effectively 9 months in this case.    VAT notice 700/18 4.3?

 

         Of course the other issue is that without credit notes your client could find themselves being sued for double the amount of the current debt. (If they then accept said new invoices without disputing them) 

                  That is a bloody good point, and one I will be checking up on. 

No apology needed Joanne, I was concerned I'd missed something on the VAT dates, so that's a relief 

I've defended the supplier as I saw the benefits as highlighted in my post, but you have also pointed out the negatives, and I appreciate that. (Nod over to Vince as well for his input)