Just taken on an new customer who uses cash accounting and they offer a discount for early payment (well early being within 3months, as the usual time taken to pay is between 9-12months or longer)
So - invoices keyed at full price with VAT.
When funds come in Ive noticed the previous bookkeeper has keyed them in two different ways:-
1) Linked payment received to invoice, taken VAT at originalamount as per the invoice, then used difference in what was paid as a sales discount (T9, ie outside scope of VAT).
2) Where no invoice was keyed, she keyed the receipt as a payment on account so VAT then calculated as amount received eg £240 received so £40 in VAT due. Then the invoice has been keyed and linked to the payment on account and a seperate entry has been keyed to show the discount (T9).
Im confused - should the VAT due be calculated on the amount actually received, so in the first example my client is paying too much VAT?
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Hi Jo, this on HMRC website ties into what I believed to be correct.
"If a prompt payment discount is offered, VAT is chargeable on the discounted tax-exclusive invoiced price, even if the customer does not take up the offer. Where an eligible business using cash accounting offers such a discount, you should ensure that the VAT accounted for is the amount actually charged on the invoice and not the VAT fraction of the payment reflecting the invoice total; otherwise the business will be accounting for more tax than is due. The input tax reclaimable is similarly limited to the maximum of the VAT charged on the invoice. Notice 700 The VAT Guide provides guidance on discounts: it is supplemented by V1-12 Valuation.
Jo, Michelle is correct.
However, the rules on calculating VAT on discounts are due to change. This change was announced in the 2014 Budget, and will come into force on 1 April 2015.
Hi Both Ive read this about 3 times now and am clearly being VERY thick today (am stressed to eyeballs so reading stuff is not a good idea!), but can you please put this into idiot speak.
Fortunately Im not letting myself loose on clients stuff till Ive cleared my head, aaagggghhhhh. ---------------------------------------------------------------------------------------------------------------------------------------------------------- If I break it down:- If a prompt payment discount is offered, VAT is chargeable on the discounted tax-exclusive invoiced price, even if the customer does not take up the offer. Ie VAT calculated on discounted net value
Where an eligible business using cash accounting offers such a discount, you should ensure that the VAT accounted for is the amount actually charged on the invoice and not the VAT fraction of the payment reflecting the invoice total; ie so that seems to be saying - VAT is payable as the amount on the invoice (regardless of whether they take the discount or not)
otherwise the business will be accounting for more tax than is due. but then that contradicts what I wrote above. Cos if i pay the VAT at the invoice amount I will be paying more VAT than if I paid it based on the £££received
If you would normally invoice £100 plus VAT but are giving a 10% early discount, you actually show £90 plus £18 VAT - £108.
If the customer pays late, they pay the full £120, yet you declare the VAT on the £108.
I believe this is because the person who bought the item, if VAT registered, should only claim the £18, as that's what's on the invoice. If you take in £120 and pay £20 VAT, you have paid too much - that's what I understand HMRC guidance to be saying.
I cant say for 100% sure I am totally correct, because I haven't done an invoice like that before, and its been year's since I saw one of those invoices come in on a bookkeeping job, as a supplier invoice. I am sure our wise owl, Les, will correct me, if I am wrong.
It seems very weird, and the only reason I have some knowledge of it, is because I remember questioning my boss on why HMRC would want to lose out on the £2 VAT, if payment was late. But I think that's because its usually supplier-to-supplier that offer these discounts, and HMRC gather that most will be VAT reg. So one claims £18, the other declares £18... and if it was £20 claim and £20 declared, its a NIL effect ether way.
Hi Michelle
When I read it with more of a clear head it does make sense, although like you I wondered why HMRC would do themselves out of VAT! But the supplier to supplier both being VAT registered issue makes sense. Also the bookkeeper before me appears to have done a marvellous job so I thought maybe I had got it wrong as she had paid the VAT at the original and higher level and just put the difference to discounts.
The only other issue Ive now found out the answer to is that the invoice itself does NOT mention discounts for early payment (at all!!) - but Ive been shown an industry wide document that some insurers and solicitors have signed up to. My customer supplies services to one of these solicitors and has verbally agreed to adhere to the terms of this document ie if they pay within 3 months they will get at a set fee say £250, otherwise they pay the full invoice fee of say £450. So this is where the previous bookkeeper is using the sales discount. I would suggest they put it formally in their invoice but they may not want to do this, in which case surely a credit note is the correct option.
The invoices are imported at the original values so will need to adjust the amount due to the invoice and I guess TI cal net as receipt of money is made, just not sure how to key the discount, which overall on your eg is £12 - so Im assuming I put £12 to discounts allowed - mu next job is to work out how to do it in sage!!
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Hi John, I think they may have, you know! Thank you so much for clarifying the net price to show. I had a niggle in my head about the net value, and hence I mentioned I might be wrong.
So it appears Jo that until new rules come in, you have to show £450 net, plus VAT on £250?? Sounds whacky!! Presumably then, when they pay £300 you would need to credit note £200 to discounts?
If you are using Sage, that might get a bit tricky - you will need to process in a way which avoids you getting a tax code mismatch error message. That will depend on how the invoice is laid out.
Hi Both
Well Ive never come across discounts in practice before although certainly heard mention of them, this one is certainly a weird one (and sorry to be on two threads!!) - Im still waiting to see if its documented in writing that they have agreed to such a practice, as opposed to verbal (although yes its become custom and practice) - just want to make sure they have their ducks in a row for if they have a VAT inspection, never mind me getting it right.
Reckon its another can of worms Ive opened up!
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
I think the VAT office will be looking to see that both parties claimed/declared the same VAT, so the net affect was NIL. I can only assume from what you have said, that the worst case scenario is, your client may have paid more VAT than he should of.. do you think an inspector will be cross, that he paid too much??
Have we got two discussions going on about this? I think all the settlement discounts I ever came across in 30 odd years were for a few percent. I don't think I'd have treated one this size as a settlement discount. I'd raise a credit note to reduce sales, otherwise it overstates both turnover and overheads.
Sorry yes two threads - my fault (put it down to one of those weeks John - nightmare!) My view was credit note too - nothing was mentioned by anyone, as usual found out when I was digging for something else. Im going to have another discussion with them next week before I get any further in. Appreciate your help!
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
