Bear in mind that to apply their way, you pay £20 VAT instead of £17.50.
If you are considering showing the customer that £2.50 VAT was included in the £15 discount, then it defeats the purpose of bothering to add the vat on to the £100 in the first place.
-- Edited by FoxAccountancyServices on Tuesday 23rd of July 2013 07:47:08 PM
I have recently taken on a client who does subcontract work for an estate agent (he is an electrician). He has been invoicing them in full, and when they make payment, they deduct 12.5% as a preferred supplier discount. Now, I looked this up on hmrc website, and advised him that he should be showing the 12.5% discount from the net amount (materials and labour), then add the vat to this discounted figure, thus obtaining the correct amount to be invoiced. He went to the estate agent to check if they are happy with this, and they have come back saying he should deduct the 12.5% from the full invoice (including vat), and that the discount includes vat (which is shown on their remittance advice). They also advise he should account for this discount as a cost of sales so can reclaim the vat.
I see what they are saying, but can anyone advise which is the more correct way of doing it (as both versions provide the same amount of vat payable). If he should be invoicing the agent's way, then which n/c should be used for the discount? 6001 as cost of sales? Surely it would be easier to just input the discounted net invoice, plus vat at the lower amount?
As an example:
My way - labour £100
discount 12.5% -£12.50
total £87.50
vat £17.50
amount payable £105.00
Their way - labour £100.00
vat £20.00
total £120.00
discount 12.5% -£15.00
(of which £2.50 is vat)
amount payable £105.00
So, the vat is the same both ways, but seems much more complicated their way........
If any of your goods or services are discounted, you charge VAT on the discounted price rather than the full price.
Yes, I saw this on the hmrc website too. However, your second point went unnoticed on my part! Cheeky blighters!! So, I will point this out to my client and let him decide - I'm fairly sure he will be in agreement that my version is more ethical!
But as the one that pays calls the tune I think that ethics may be out the window if the client wants to retain their preferred supplier status.
Sorry, right or wrong I fear you will need to adopt their method if your client is to remain working with them.
And of course, working for them means retaining the ability to pay you so lets see that forced smile on your face as you go against your ethics, lol.
Seriosuly though there is nothing here in either approach that is worth your worry.
Your client is in the same position via either route and the clients client ends up a little better off.
I would adopt their approach and still manage to sleep soundly... And not just cos the storm kept me up all last night.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Yes, I suppose you are right ***grumbling out loud**** ! As they are a large-ish company, I don't suppose they will change their methods to suit one small electrician....! So, assuming he follows their method of invoicing, would I allocate the discount to the 6001 nominal code as a cost of sales?
Bear in mind that to apply their way, you pay £20 VAT instead of £17.50.
If you are considering showing the customer that £2.50 VAT was included in the £15 discount, then it defeats the purpose of bothering to add the vat on to the £100 in the first place.
-- Edited by FoxAccountancyServices on Tuesday 23rd of July 2013 07:47:08 PM
I agree completely, however as Seamus pointed out, if it keeps them happy, and my client as a preferred supplier.....
Although the vat paid is £20, we can also claim back £2.50 in cost of sales, so effectively the same. However, you have brought up a valid point though worth pondering over! My inclination is to advise him to invoice my way, which is the correct way, but as the invoices are relatively small (£30 here, £40 there), it seems daft to upset the apple cart perhaps.
Just to look at things from the suggestion that the VAT on the £15 will be accounted for...
Gillys - labour £100
discount 12.5% -£12.50
total £87.50
vat £17.50
amount payable £105.00
Their way - labour £100.00
vat £20.00
total £120.00
discount 12.5% -£15.00
Vat on discount 2.50
amount payable £105.00
Then you would have to put a net and vat summary at the bottom of your invoice to make it very clear that they can only reclaim £12.50 and that the net purchase is £87.50
So, you are right when you ask what is the point of their way? All it is doing is getting to your way, but by going the very long way around.
You could even go as far to issue a £120 invoice and a £15 credit note.. but whats the point?
just to emphasise that when the VAT is calculated it always assumes that the maximum allowable discount has been taken.
Therefore, VAT on £100 with a 12.5% discount was always £17.50 and never £20.
No need to claim anything back as it will never have been paid.
kind regards,
Shaun.
p.s. I think that HMRC is wrong to allow that. I'm just repeating the rules here. Not saying that I agree with them... Must add that one to my list for when I'm chancellor along with the mileage anomaly between self employed and single director ltd's.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
