VAT on supplier rebates

[Rob-Ed]

We're part of a buying group which gives quarterly rebates to its members based on their spend. The supplier pays a rebate to the buying group and the buying group gives a proportion of this to the buyer (us). No credit notes are issued, only a statement.
The buying group has described the rebate as a 'discount applied in arrears'. I would expect a goods discount to have an associated reduction in VAT.
Treatment of VAT is far from clear. VAT is not mentioned by the buying group, only a total rebate figure. If we were buying direct from the supplier VAT total would be specified separately from goods total on a rebate credit note.
We are VAT registered.
It seems we have two options but I can't determine which is correct;
1. Treat the rebate as outside the scope of VAT (this seems to be what the buying group accounts dept are suggesting)
2. Treat the rebate total as gross, calculate and enter net+VAT into our accounts package (Sage)

Any advice appreciated.
Thanks, Rob

 

[Rob-Ed]

I *think* I've resolved the issue. It turns out that the rebate is based on net figures, should be safe to use 'outside the scope of VAT' for this...

 

[GraemeL]

We were caught on this following a VAT man visit - about 9 years ago mind.

In order for us to get the rebate from our supplier, we were required to invoice them for the amount plus VAT.

In order for our customer to get the rebate from us, we had to issue them a credit note plus VAT. (Or else they had to send us an invoice, plus VAT)

 

[lesvatadvice]

There is a provision where credits between fully taxable businesses can be issued VAT-free. See Notice 700, chapter 18. (www.gov.uk/guidance/vat-guide-notice-700#credits-and-debts) It would be worth double-checking with the other party to make sure this is agreed.
And, is there a written contract which provides for this arrangement?

 

[Paul Kelly ICHYB]

When I worked as a retail buyer, the rebate was calculated based on ex VAT purchases and VAT was added.

How are you calculating the rebate? Is it on gross purchases or based by supplier? Either way, I would suggest that also would include VAT. You could issue self billing invoices and send the money.

 

[Rob-Ed]

Thanks for the replies. Seems like it isn't quite as straightforward as I'd concluded.

The group doesn't issue us with rebate credits, only a statement detailing the various percentage rates and GBP total rebate for each supplier. The statement shows rebate figures net of vat. All invoicing is carried out via the group on a net+vat basis. The official term for the rebate is a 'contingent discount'.

I have received a detailed letter of explanation from the group's accounting department. This also references notice 700 para 18.2. There appears to have been a rebate process agreed between HMRC and the group's advisors, who in turn agreed the procedure with the individual suppliers. The group issues a rebate request net of VAT to the supplier who then remits the net figure back to the group, this is then forwarded to us. No VAT is involved BUT I'm sure I'd read somewhere that the VAT has to be mentioned in our returns despite the NET VAT effect being zero.

Ho hum. Still as clear as mud.

 

[GraemeL]

If all parties are VAT registered, then it's hard to see any disadvantage of using VAT on everything?

 

[Argentum Tax]

If all parties are VAT registered, then it's hard to see any disadvantage of using VAT on everything?

Unless one or more of those parties was partially exempt!

 

[Rob-Ed]

Sorry to dredge up this old thread. We've just received our second quarterly rebate and it reminded me that I wasn't 100% confident in my original conclusion, I had meant to investigate further.

There is still a nagging doubt in my mind. We are originally invoiced including VAT by the supplier. The rebate received, or 'contingent discount', does not involve VAT, it's a percentage of the invoiced net purchase price. We initially pay the supplier for goods+VAT and they 'credit' us for a percentage of the goods only. My current thinking is that our suppliers have harvested the VAT for HMRC, will hand it over as part of their VAT return and therefore we can safely ignore it.

Any further thoughts please??

 

[UK Contractor Accountant]

As pointed out VAT Notice 700 Para 18.2 applies.

18.2.1 Introduction
When you allow a credit or contingent discount to a customer who can reclaim all the tax on your supply as input tax, you do not have to adjust the original VAT charge provided both you and your customer agree not to do so. Otherwise, you should both adjust the original VAT charge. You should issue a credit note to your customer and keep a copy.

 

[Rob-Ed]

Great! Thanks for clearing that up.