DEBIT NOTE process

baduk10

Hi

Has anyone experience of a real life DEBIT NOTE process?

Our software company has set up a facility on our accounts package to process debit notes. My understanding of a debit note was that is more of a paper trail exercise to inform our supplier that we have returned goods and that a credit note will be expected by return? Therefore the debit note, in my view would be a provisional stop gap between returning the goods and receiving the correct VAT credit note – on the basis of this I feel that the debit note should not be treated as a VAT credit note, which is what my director wants me to do... On the basis of this surely we are making the assumption that the credit issue will be granted. Under normal circumstances I can see how the process should work..... i.e. we buy two widgets from a company and get invoiced; subsequently the product proves faulty, we return the two widgets and process a debit note and the supplies accepts the fault and returns a credit note.. Hey presto job complete. If life was as straight forward as this we wouldn’t have a problem…

Any views gladly received…

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Woooof

If you've been charged VAT on the original invoice, the debit note should have it too.

That's what my company does anyway.

baduk10

Hi

Thanks for that.

I understand where your coming from and the process in principle, but our situation is that we have issued a debit note, but the supplier is disputing it due to their goods return policy, so in effect if we process a debit note with VAT and don't receive a credit note from the supplier, which is what has happened? What happens then?

Regards

baduk10

Maybe I should explain what has happened in full:

We placed an order with our supplier for £10K worth of stock. The order went through and got processed as normal. Unfortunately for some reason our system then raised a duplicate order which also went to the supplier and theses goods were also despatched to us, so now we have £20k worth of stock. Our director contacted our supplier explaining the error and our supplier has said whilst they do sympathise with us, unfortunately they had to order the goods in specially to complete our duplicated order. I'm sorry but you should have checked your ordering system… I agree they have a fair point. Anyway, having discussed the matter further with the supplier they have agreed to accept half of the goods back with a small handling charge… our director ignored this and returned all of the goods and issued a debit note for the full value. The supplier has now said that they will issue a credit note for the complete duplicated order, but only as and when we place new orders with them, which could take up to 6 months… so when we place an order for £3k new stock they will issues a credit note for £3k against the duplicated old invoice error….

So what I am saying is that if we process a debit note for the full value with VAT element we will not have a credit note to match this…. Until maybe 6 or 9 months time…..

Woooof

baduk10 wrote: »

So what I am saying is that if we process a debit note for the full value with VAT element we will not have a credit note to match this…. Until maybe 6 or 9 months time…..

That shouldn't be a problem, the debit note VAT will offset against the duplicate invoice.

When you receive the goods again you the credit note VAT and the cancellation of the debit note will match and you will just the new invoice VAT.

Everything is fine with what you are doing, no need to worry.

baduk10

Ok thanks for taking the time to respond.

I now have peace of mind.... :-)

Do your debit notes have all the relevant info on them, i.e., company logo, address, co reg number, VAT number and so on?

The only reason why i ask this is because where our debit note system is new we are not able to print our debit notes off, so can only do a screen print of what we have processed. Because we are unable to print ours off we are not able to send an official copy to our supplier. From what i understand if we are using a debit note system the debit note should contain the same legal info as an official sales invoice - is that correct?

Regards

coojee

I don't see how you can process the debit note in the accounts system at all as it's just a fictitious transaction at the moment. The legal position right now is that you are still liable to pay the supplier the £10K, the fact that they've agreed to credit it at some future date doesn't change that. I can see that maybe for management accounting purposes you may want to make an adjustment to purchases and creditors but I wouldn't do this with VAT on it. Until the supplier issues a credit note the VAT is still valid, although if the invoice still hasn't cleared within 6 months you would have to repay the VAT to the VAT man.

Am I missing something here?

baduk10

Exactly, this was my initial concern. Having said that I did look on the HMR&C website and they do support a debit note system and according to them the VAT issue is the same as if the debit note was a credit note received from the supplier. I only work for a small SME, but we do occasionally receive debit notes from larger corporate organisations, although our viewpoint on the matter is that whilst we acknowledge their debit notes we only action and process a credit note if we are satisfied with the circumstances surrounding the situation.

Whilst I am happy with the mechanic of the debit note system, credit B/S stock and provisionally debit the trade creditor with the gross amount I am reluctant to process the VAT aspect at this point in time, because I haven’t received a VAT credit note from the supplier, which is what essentially details the VAT to be repaid to the revenue, which is why I was surprised to read the previous comment on this matter, but then I thought if larger organisations are carrying out this process, then maybe I have missed something.

What I fail to get my head around is that process almost gives the buyer to power to dictate when a credit note is due, rather then the seller making this decision!!!!

Regards

Woooof

I really don't see why this is going so in depth We are a global company and we include VAT everytime we raise a debit note against a supplier and every customer does the same to us. If you don't receive a credit note you cancel the debit note and pay the VAT back.

baduk10

OK your point granted – but why would I want to repay the VAT office VAT in advance (the Debit note would create this transaction) of a potential credit note that we haven’t yet received only to find out later that a credit note hasn’t been granted, therefore having to reclaim the VAT again. I can see why HMR&C support this as they are getting the VAT element back early, but there cashflow is far better than our!!!

VAT on £10k is a fair chunk!!!!

Woooof

Ok...

You have the original invoice with VAT which is cancelled by your debit note so no VAT is paid to anyone.

Now there are two situations:

1. If you receive a credit note in the future, you have to cancel the debit note so the VAT matches off again, when they send them again against a new invoice you will reclaim the VAT against that.

2. If you don't receive a credit note, you have to cancel the debit note. I presume then you will get the goods back, which means you'll reclaim VAT on the original invoice.

If you aren't use to debit notes it is hard to get your head around it. Our company deals with 20+ a day xD

baduk10

Yep.... point taken and understand what you are saying.... and agree that I don't have much experience of the debit note process and too be honest it's not an easy concept to get your head around - so for that I accept your explanation....

but if the senario was that the original invoice had been processed and held until query resoltion and all of this happened in a previous VAT period, for which the VAT return has been filed it would see us repay the VAT element to the revenue early prior to receiving an offical credit note - it's just a thought...

:-)

baduk10

Maybe it because I am seeing the debit note process as a form of provision and like accruals provision you wouldn’t bring the VAT aspects into the accounts at the accruals point….

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