Trade credit and interest accounting


The financial crisis has affected many companies, problems with meeting their liabilities began to be experienced by companies, which so far coped with it perfectly. Obtaining a bank loan to pay current liabilities was in many cases impossible. Therefore, in such a situation, a very good solution is the so-called trade credit.

Trade credit

A trade credit is an unnamed contract, which consists in the consent of the seller to receive payment for a service or goods provided with a deferred payment date in a period previously determined or resulting from the contract. No specific legal form is required, but a contract may be drawn up as confirmation of the agreed terms and payment terms.

Trade credit comes mainly in two forms:

  • customer's credit in the company, advance payments,

  • supplier credit.

Trade credits are granted according to two methods:

  • individual approach - it consists in checking the creditworthiness of the contractor, and based on the obtained data, a credit offer is prepared,

  • system approach - consists in grouping clients and assigning them to appropriate groups according to the terms of granting a loan.

Trade credit - interest

Granting a trade credit by the seller may increase its attractiveness in the eyes of buyers. On the other hand, the entrepreneur runs the risk of losing liquidity if he does not have enough cash and buyers would be late with payment. When concluding transactions with deferred payment, the buyer's advantage is the possibility of a longer turnover of funds. Very often, the buyer has the option to choose whether he wants to settle the payment immediately, receiving a rebate in return, or use his own funds for a longer period of time and pay for the goods at a later date, paying additional interest on the trade credit.

As already mentioned, granting a trade credit may result from the provisions contained in the contract or from the invoice issued to the recipient. The benefit and remuneration for the trade credit granted are the interest that the recipient pays in return for the deferred payment date. Granting a trade credit is not associated with a complicated procedure, which is why this form of financing is often used by entities that are unable to obtain a bank loan.

Trade credit insurance

The trade credit insurance policy covers the receivables with interest for the sale of goods or the provision of services. The policy may be concluded for both domestic and foreign transactions. The policy specifies the maximum period within which the fee must be paid, if the buyer is late with the payment, the loss may be liquidated. The premium is calculated based on the risk assessment and the contractual credit limits for specific entrepreneurs. The policyholder also participates in the risk.

Interest on trade credit - judgments

The position regarding the method of taxation of interest related to the trade credit was not uniform. It was discussed whether this interest should be treated as a separate financial service and should benefit from VAT exemption, or whether it should be treated as an integral part of the supply of goods or services and should be taxed at the same rate. On October 27, 1993, the Court of Justice issued a ruling in case no. C-281/91. The Court ruled that where interest is charged by the seller, the deferral of payment covers the period after the goods have been delivered or the service has been performed - this is treated as a separate financial service and is subject to VAT exemption. If the payment is postponed until the service or goods are delivered, it is treated as a component of the remuneration for the service or goods and is subject to the same VAT rate, even if it has been agreed in a separate agreement.

The Director of the Tax Chamber in Katowice in the interpretation no. IBPP2 / 443-891 / 14 / ICz and the Director of the Tax Chamber in Warsaw in the interpretation no. financial ones that benefit from VAT exemption.