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Cash/Settlement Discounts (VAT Situation)

  • 5 posts
  • # 74655

Dear all,


I was just shifting through a study book for level 1 and 2 icb bookkeeping, and one section was about   Cash and settlement discounts (discount applied depending on time taken by customer to pay invoice). It said that VAT was calculated from the discounted price regardless of whether the discount was taken. Is this true, and if so why?


thanks for ur help

Anthony    

  • 36 posts
  • # 74666

AllanAnsaid:

“Dear all,


I was just shifting through a study book for level 1 and 2 icb bookkeeping, and one section was about   Cash and settlement discounts (discount applied depending on time taken by customer to pay invoice). It said that VAT was calculated from the discounted price regardless of whether the discount was taken. Is this true, and if so why?


thanks for ur help

Anthony    ”


Perfectly true, only applies to settlement discount. Reason when you offer the disc -you don't know whether / not the customer will take advantage. So we assume that the customer will take advantage always. Otherwise yo have to mess around with credit notes if the customer does take advantage & vat charged fully. Disc. vat means you only need to adj for the actual discount if taken.

  • 698 posts
  • # 74689

Dear Anthony.

As far as I am aware the reason it was done in this was regarding settlement discounts is to save people having to make adjustments and or disclosures on their VAT return.

With all other forms of discount the VAT is correct as the discount is already given however with settlement discount it may or may no be taken.

If the invoice is raised at the quarter end and the VAT was not adjusted you would declare and pay a higher amount on your VAT return during on the following quater the invoice is paid and the discount deducted you would then have overstated yopu VAT and would have to adjust it for it on the next return.

Basically it is a time saver from HMRC.

Kind regards
Stuart

  • 9 posts
  • # 76398

Hi, I am also confused by this. Lets say an invoice for £120 (£100 + £20 vat) was offered with a 3% settlement discount, does it mean we (the bookkeeper) will put it as £97 sales +£19.40 VAT (£116.40).

 Then if they don’t take the discount will the VAT will still be £19.40 and net £100 (£119.40)?  

  • 269 posts
  • # 76399

Lee The Rookiesaid:

Hi, I am also confused by this. Lets say an invoice for £120 (£100 + £20 vat) was offered with a 3% settlement discount, does it mean we (the bookkeeper) will put it as £97 sales +£19.40 VAT (£116.40).

 Then if they don’t take the discount will the VAT will still be £19.40 and net £100 (£119.40)?  



The invoice will state

Net £100
Vat £19.40
Total £119.40

The above will be what is initially recorded in the accounts. If the discount is not taken this will be the amount that is paid and nothing more will change in the accounts.

If however, the discount is taken then then discount of £3 will be allocated to discount taken/allowed (dependant on whether you are the customer or the supplier) and the payment will be for £116.40 (£97 + £19.40).

If this was being done through Sage, when you go to pay the invoice they have a column for discount, so the sytem would automatically allocate as necessary.

Hope this helps.

Regards
Kerry 

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