Retrospective discount

What it means

A retrospective discount is a price reduction the supplier grants after the goods or services have been delivered. Most often it is a volume rebate for purchases reached over a quarter or year, but it can also be a discount on a complaint or for prompt payment, an early payment discount.

The supplier issues a corrective invoice, in practice called a credit note, which reduces the taxable amount of the original supply. If the discount covers several invoices over a period, the credit note may be a summary one referring to the period, with the taxable amount broken down by rate.

For VAT this is a correction of the taxable amount: the supplier reduces its output VAT in the period the credit note was delivered, and the customer must reduce the input VAT deducted in the period it received it.

How it works in practice

In the books the supplier reduces revenue and the customer reduces costs or the acquisition cost of inventory, depending on what the discount relates to. If the goods have already been sold, cost of goods sold falls; if they are still in stock, the inventory value falls.

Volume rebates are often agreed in a framework agreement and settled only after year end. If the entitlement is known at 31 December but the credit note arrives the following year, we book it as an accrual so that the year’s result reflects reality.

Credit notes must appear in both parties’ control statements in matching periods. For clients we therefore record the delivery date, and if the supplier sends credit notes only by email, we archive the email as proof of the date.

What to watch out for

Customers often forget to reduce their VAT deduction because they see a credit note as good news rather than a document with tax consequences. The mismatch with the supplier’s control statement surfaces anyway, and the tax office asks for an explanation and reassesses the difference with interest.

Not every benefit from a supplier is a discount. If the customer does something for the rebate, such as promoting the products, giving them better shelf space or supplying marketing data, it may be a separate service by the customer, invoiced with VAT. The distinction depends on the contract and what is actually done.