VAT - early settlement discount - The Book-keepers Forum (UK)

Chriss · Veteran Member

VAT - early settlement discount

kjmcculloch · Guru

I'm sure there's a more complex answer but mine would be because thats how HMRC say you should calculate VAT.

Discounts on goods and services

If any of your goods or services are discounted, you charge VAT on the discounted price rather than the full price.

Kris

Chriss · Veteran Member

Thanks for your reply - It's just that I'm having a dispute @ work regarding early settlement discount as they don't calculate VAT on the discounted net.

Regards

Chriss

kjmcculloch · Guru

for more information check the hmrc website:

http://www.hmrc.gov.uk/vat/charge-discounts.htm#1

Quentin Pain · Senior Member

You must show the VAT due on the discounted amount regardless of whether they take the discount. Eg:

Sub Total: 10.00
VAT: 1.58
Net Total: 11.58
10% Early Settlement Discount (ESD)

So the VAT (17.5% at the time of writing) is applied to 9.00, not 10.00. I have just verified this with HMRC today. Bear in mind that laws do change so always check with HMRC if in doubt. Note that for ESD, or 'Prompt Payment' as HMRC now refer to it, it has always been this way!

However, if the customer pays by installment, then you must account for VAT at the actual price paid.

I have put an article on my site about it:

VAT Early Settlement Discount

PhilMcTankup · Senior Member

VAT is scary, so many ifs and buts. You learn one rule to find there is another one to contradict what you thought was gospel. I just hope my first client isn't VAT registered!

mernolen · Newbie

Thanks. I also met the same problem.

kjmcculloch83 · Expert

I remember having a similar problem with my college lecturer who is an accountant. She was teaching us to calculate VAT on the full amount. It took 3 weeks of arguments and leading her through the HMRC website and she still didn't believe me, eventually I had to ask another lecturer and she had a word.

Theres a post on here somewhere about it.

Kris