The Book-keepers Forum (BKF)

Post Info TOPIC: Cashback - income for corporation tax and vat, or not?


Member

Status: Offline
Posts: 10
Date:
Cashback - income for corporation tax and vat, or not?


I have a query regarding business income for cashback on a VAT registered limited company registered in the UK. We recently opened up a†PayPal Business Debit Mastercard†and you receive 0.5% cashback on all purchases. We have a separate PayPal account for any business transactions and PayPal pay the cashback received to the PayPal account directly into the PayPal balance. I wanted to check that this is non-taxable money, thus does not need to logged as company income, and not applicable for VAT deductions - is that correct?

I am also concerned that it may make our accounts a little more complex, for example if we pay for something for £100, it will first deduct the cashback amount available in the PayPal balance and then charge the rest on the connected bank account. This means that the invoices we receive and pay will not show the correct amount in the bank statements since it was partially paid using cashback - which also means our vat claims will need to be adjusted accordingly, different to what the vat amount says on the invoices and the actual amount paid will show lesser than the invoice (due to cashback being spent first before the connected bank account) - may someone know a particular way to arrange to rule out the above complications?

We could potentially cash it in to the bank each time cashback is paid into PayPal balance, but I would also need to post the cashback monies to the correct category so that it is not seen as taxable income.



__________________


Forum Moderator & Expert

Status: Offline
Posts: 11916
Date:

sounds as though you should be looking at notice 700/7 that deals with this... If in a somewhat complex manner. Specifically you would need to read section 10.

I would in particular draw your attention to section 10.4. Specifically:

as an incentive, the intermediary provides reimbursement to the customer after a period of time. The reimbursement is often funded from the intermediarys commission.

As the intermediary is not providing the primary service, the cashback cannot be treated as reducing the consideration payable by the customer for that service. The intermediary cannot make any VAT adjustments in these circumstances. The payment is an inducement and does not reduce the consideration paid by the customer for the supply.

Therefore the reimbursement is treated as other income in the accounts rather than being credited directly against the item/service purchased.

The key here is that the money is being refunded from commission by the card company. Not by the manufacturer therefore there is no reduction of VAT liability by the recipient of the refund.

The refunds are taxable income not a reduction on the cost of goods or services. How you store / move the money is of no consequence to the accounts.

In these sort of situations I often find it best to open up an Excel spreadsheet and work out long hand where the input/output VAT is. The VATman never loses out but similarly there should be no instance where the same money is accounted for twice. If you encounter that then somewhere along the path something has been misunderstood. In this instance it was thinking in terms of the goods being purchased rather than in terms of the finance charges applied.

Hope the above makes sense. As I say, this IS taxable income. This does not adjust your VAT position on the purchase.

kindest regards,

Shaun.



__________________

Shaun

Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.



Master Book-keeper

Status: Offline
Posts: 3786
Date:

Just thinking of the entries Shaun, how would you deal with it?

eg† Invoice £100† Payment made £99.50 leaves 50p on the suppliers account.



__________________

John†

†Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.



Forum Moderator & Expert

Status: Offline
Posts: 11916
Date:

Leger wrote:

Just thinking of the entries Shaun, how would you deal with it?

eg† Invoice £100† Payment made £99.50 leaves 50p on the suppliers account.


Hi John,

hope tht you are well matey. My approach would be...

Supplier Invoice £100

Payment £100

Other income 0.50p

The business is still making full payment for the goods received.

The 0.50p is an incentive payment rather than a reduction in the cost of the goods as it is received from the intermediary rather than from the supplier.

From the suppliers perspective they only paid the charges that they would always have paid. And they sold the goods at the price they would have been sold at anyway. In many ways they are not party at all to the cashback part of the transaction.

Shaun.



__________________

Shaun

Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.



Master Book-keeper

Status: Offline
Posts: 3786
Date:

Hi Shaun, I'm doing fine matey, hope life is good with you as well.

No qualms on the supplier side, they still get their £100 and the invoice has been settled

However, going by how Jennifer describes it, Paypal only deduct £99.50 from the account, but pay the Supplier £100.00.

if £100 was deducted, and they got the 50p credited back, then it's other income, I get that.

The Company benefits exactly the same, but I can't get my head around how to do the transaction



__________________

John†

†Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.



Forum Moderator & Expert

Status: Offline
Posts: 11916
Date:

If PayPal are doing that then they are essentially offsetting two transactions with one of them being completely invisible but non the less it exists.

What has actually happened is that Jennifers business has paid £100 to PayPal. PayPal pays £100 to the supplier, PayPal then returns 50p to Jenifer but to simplify the flow they are offsetting so they are only taking the £99.50 which is what is confusing matters and really what one should be doing is applying substance over form.

Jenny cannot end up at the end of the transaction showing outgoings of £99.50 when she has an increase of £100 in stock and additional income of 50p as that does not reflect the true nature of the transaction that has actually occured.

The confusion is completely down to the supplier of finance offsertting the transaction which confuses things.

Hope that makes sense.

Got Mother staying with me at the min. She's got vascular dementia (i.e. the non hereditory one, phew) and things are getting pretty rough here (and occassionally amusing, chatting to someone with no memory is even more fun than chatting to business owners trying to disguise their expenditure) so had to take a break from work. The silver lining to that is that I get to spend a bit more time on here so on occassion able to give longer more detailed responses than just removing the odd miscreants poorly disguised marketing posts.

Talk in a bit matey,

All the best,

Shaun.



__________________

Shaun

Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.



Master Book-keeper

Status: Offline
Posts: 3786
Date:

Hi Shaun, sorry to hear about your mum, but good that you are getting some precious time with her.

So basically a manual adjustment needed?† † Ah, sussed it.† Journal:† debit supplier - credit income - other.† Bit fiddly if loads of transactions though.



__________________

John†

†Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.



Forum Moderator & Expert

Status: Offline
Posts: 11916
Date:

But why would the supplier of the goods come into that? Is not the transaction purely with the finance suppier not the goods supplier, so would not the transaction really be just other income and bank which balances out the cash accounted for but not sent in the purchase part of the transactions.

I would think of it not so much as a reduction of a specific purchase but rather an income stream. That should keep the tranactions relatively simple and mean that one is able to bulk up the refunds (daily/weekly/monthly dependant on volume). I am not seeing a direct link between the income and the expenditure except in how the transaction is performed. To me the two elements are completely divorced and the income is purely between the company and PayPal. Not really the company and the end supplier who are only incidental to the final result.

Hope that makes sense.



__________________

Shaun

Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.



Member

Status: Offline
Posts: 10
Date:

Thank you so much for your replies. I am still a little confused but it looks like majority of comments are implying that this should be treated as taxable income.

I would like to note that this is not considered a discount as some have suggested above - this is rather a reward which is given based on spending amounts over a period of time using a card. This reward is provided by PayPal themselves (not the seller where we have purchased goods).

Here's an example and I figured this may be treated the same - when you have a bank, some of them give you credit interest based on the amount being held in the bank- I see this being similar as the original enquiry, would this be subject to taxable income?

Another example, if a company gives compensation as part of a complaint procedure, would this be subject to taxable income?

I ask these questions as I am trying to understand how we should categorise and file for any monies received as part of this PayPal cashback scheme.

__________________


Guru

Status: Offline
Posts: 1233
Date:

Hi Jennifer

I reply to your 2 examples

Yes if your Company receives interest from the bank then it is taxable.

With the compensation, it depends on what the compensation is for, it may be taxable or it may not.



__________________

Doug

These are only my opinions of how I see things and therefore should not be taken as advice



Forum Moderator & Expert

Status: Offline
Posts: 11916
Date:

Jpeterson85 wrote:

Thank you so much for your replies. I am still a little confused but it looks like majority of comments are implying that this should be treated as taxable income.

I would like to note that this is not considered a discount as some have suggested above - this is rather a reward which is given based on spending amounts over a period of time using a card. This reward is provided by PayPal themselves (not the seller where we have purchased goods).

Here's an example and I figured this may be treated the same - when you have a bank, some of them give you credit interest based on the amount being held in the bank- I see this being similar as the original enquiry, would this be subject to taxable income?

Another example, if a company gives compensation as part of a complaint procedure, would this be subject to taxable income?

I ask these questions as I am trying to understand how we should categorise and file for any monies received as part of this PayPal cashback scheme.


Exactly as I was saying Jenny.

The transaction is not with the supplier of the goods but the supplier of the finance.

There is no discount to the goods.

I believe that some confusion happened because it was implied that the transaction itself was discounted which I suggested that you needed to use substance over form as if that was the case it was offsetting, not discounting.

You pay the full amount for the goods. Any money you receieve by way of reward from the finance intermediary is taxable income.

You categorise this as other income as whilst it is not trading income as such it is still income.

Lets just take an example here of whats going on.

You owe a supplier £1000

You pay the supplier £1000 via an intermediary

You receive goods and / or services to the value of £1000.

The intermediary pays you £5 for using their services

Intermediary charges the supplier £10 for using their services.

Now the confusing bit

The intermediary only takes £995 off you making you think that it is a discount. That is not right. What they are actually doing is offsetting the transaction. You have paid £1000, you have received £5.

Similar the supplier receives £1000 but is charged £10 so they are paid £990. Again because of offsetting where the reality of the transactions are that they received £1000 and paid £10.

Offsetting is perfectly acceptable and reduces risk of fee's being delayed or not paid. But it may confuse that the full transaction is different to how it initially appears. Once you get your head arond it it's quite straight forwards.

HTH,

Shaun.



-- Edited by Shamus on Wednesday 4th of August 2021 06:34:00 PM

__________________

Shaun

Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.

Page 1 of 1  sorted by
 
Quick Reply

Please log in to post quick replies.

Tweet this page Post to Digg Post to Del.icio.us
Members Login
Username 
 
Password 
    Remember Me  
©2007-2021 The Book-keepers Forum (BKF). All Rights Reserved. The Book-keepers Forum (BKF) is a trading division of Bookcert Ltd. Registered in England Company Number 05782923. 2 Laurel House, 1 Station Rd, Worle, Weston-super-Mare, North Somerset, BS22 6AR, United Kingdom. The Book-keepers Forum and BKF are trademarks of Bookcert Ltd. This forum is a discussion forum only. There will usually be more than one opinion to any question and any posting should not be viewed as a definitive solution. No responsibility for loss occasioned to any person acting or refraining from action as a result of any posting on this site is accepted by the contributors or The Book-keepers Forum. In all cases, appropriate professional advice should be sought before making a decision. We reserve the right to remove any postings which are offensive, libellous, self-promoting or engaged in covert marketing. We will not notify users of removals. The views expressed in the forum posts are those of the individual and do not necessary reflect or agree with those of The Book-keepers Forum. Any offensive or unsuitable posts will be removed by the moderators. Any reader of this forum can request for a post to be looked into by sending an email to: info@bookcert.co.uk.

Privacy & Cookie Policy  About