Unusual credit situation on purchase invoices - The Book-keepers Forum (UK)

Leger · Master Book-keeper

Unusual credit situation on purchase invoices

Cheshire · Master Book-keeper

Hi John
Congrats on the 3000 posts!

Im confused - wondering if I have read this wrongly as it sounds like a big cashflow (and other) fiddle!

Who has paid the factoring company?

Why would anyone credit the original invoices - they are valid are they not? Just way overdue!

The supplier should produce credit notes for the later wrongly issued invoices, as these, it sounds, have been created so the factoring company will provide them with cash for one, but have only been issued to show the amount outstanding, therefore are the invalid ones.

Client receiving said later invoices should dispute those invoices immediately with the factoring company as well as the supplier! Tell them they received no stock against the later invoices!

VinceH · Expert

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:

Supplier has raised invoices for whatever your client has purchased.
Supplier has factored those invoices to receive their 80%(?) advance.
Your client hasn't paid by the due date according to their credit terms.
Supplier has credited the original invoices, and repaid their 80% to the factoring company.
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.

Caveat emptor.

C'est la vie.

Escargot.

Etc.

Edit: My list got manglinated. And some silly grammar mistakes that really jumped out and punched me in the face after I hit 'post' - but there are probably more.

-- Edited by VinceH on Friday 9th of August 2019 03:51:40 PM

Leger · Master Book-keeper

VinceH wrote:
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:
Supplier has raised invoices for whatever your client has purchased.
Supplier has factored those invoices to receive their 80%(?) advance.
Your client hasn't paid by the due date according to their credit terms.
Supplier has credited the original invoices, and repaid their 80% to the factoring company.
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.

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.

-- Edited by Leger on Friday 9th of August 2019 04:55:42 PM

Leger · Master Book-keeper

Cheshire wrote:
Hi John
Congrats on the 3000 posts!

Thanks, I knew I was near and hadn't realised I'd got there.

The supplier should produce credit notes for the later wrongly issued invoices, as these, it sounds, have been created so the factoring company will provide them with cash for one, but have only been issued to show the amount outstanding, therefore are the invalid ones.

Client receiving said later invoices should dispute those invoices immediately with the factoring company as well as the supplier! Tell them they received no stock against the later invoices!

See my post to Vince, supplier has done this to help client, just need to record it properly in her accounts.

VinceH · Expert

Ugh. My guess was messy enough - that's even messier! I hope the supplier has someone competent looking after their books, because it would be so easy to screw up the transactions surrounding this! But that's their problem! :)

If the supplier hadn't issued new invoices, I'd have shown it as a loan to be repaid - but I guess they did it that way so that the factoring company still deals with collecting payment.

In which case, yes, I'd be inclined to do as you originally suggested; credit the amount that was outstanding, so the final balance is the same as before, who it's owed to is the same - the only difference is that the system now shows it due at a later date because it's made up of the newer invoices. (The only issue is handling things so as not to account for things incorrectly if any key points are crossed, such as VAT returns etc).

Leger · Master Book-keeper

Thanks Vince. The old invoices relate to the June quarter for VAT. Should the credit notes be dated in that quarter or this quarter? (Accrual VAT)

VinceH · Expert

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 · Master Book-keeper

Thanks Vince, I hoped that would be the case, and that was my initial thought until you mentioned correct VAT quarters.

I totally agree this is messy for the supplier, and I'm surprised they've done it this way.

Cheshire · Master Book-keeper

So the supplier has paid the factors back.

How old are the original purchase invoices? What VAT return were they in?

Why exactly has the supplier done this?

I missing the point clearly. What has either business got to gain?

I can still only see trouble ahead and one that might mean a VAT issue.

Leger · Master Book-keeper

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.

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.

Both businesses gain because the supplier gets their money a lot quicker and my client gets extended time to pay and avoids a black mark on her credit rating.

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.

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

Cheshire · Master Book-keeper

Leger wrote:
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.

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 · Master Book-keeper

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)

Leger · Master Book-keeper

Cheshire wrote:
Leger wrote:

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.

Cheshire · Master Book-keeper

Sorry John
Got my dates and timing mixed for VAT. Only excuses (not good enough) - was on my ipad and cannot see the Q when I start responding so try to remember (with failing memory) the dates etc. Didnt even recall you put a year end in! Memory really bad!

So yes the VAT notice you mentioned is the correct one.

More important that credit notes are not dated in March given thats your clients year end.

Not fishy from your end, as long as everything is dated correctly and applied correctly as Vince has said. Bloody fishy from suppliers.

Leger · Master Book-keeper

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

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)

Cheshire · Master Book-keeper

To be a pain - a what if scenario:-

1) what if the supplier refuses to provide credit notes

2) what if the supplier provides credit notes but these are dated in March?

No need for an answer - just putting it out there.

The suppliers are at best breaking their T&Cs with their factoring company. So the best you can do is protect your client of course. Plus making sure you get paid up front.

VinceH · Expert

"Not fishy from your end, as long as everything is dated correctly and applied correctly as Vince has said. Bloody fishy from suppliers."

It probably isn't - as John said, it's probably just a bit of a goodwill gesture on the supplier's part to help out the client (it's nice not to be my usual cynical self; unusual for me, I know!), but you are of course correct that they're almost certainly breaking the Ts&Cs of the factoring company, and if you don't know what's going on, it does look as fishy as f...

On the issue of the supplier potentially chasing for payment of both the original invoices and the new ones, which you mentioned further upthread, I took it as read that there would be some kind of agreement in written form supporting what's going on - even if just an exchange of emails arranging it - so should that situation arise, the client can point at it and say "Look, no, it's not additional invoices/debt, this is what we agreed to do..."

Should have mentioned that there needs to be something, really!