VAT on invoices offering discount


S

Slartibartfast

For several years the main supplier of goods for my business has offered a
discount for settlement within seven days. The VAT shown on the invoice was
always 17.5% of the amount due AFTER discount was deducted.

Following the introduction of new computer systems, the invoices now show
VAT based on the full price of the goods sold.

I know that in the long run this doesn't make any difference to me, but it
does have a small implication as far as cash-flow is concerned, as I now pay
more VAT week-by-week, and in effect get it all back only when I make my
quarterly VAT payment.

But it got me wondering: is either method of calculating VAT the correct one
or can they both be used? Someone has suggested to me that when I deduct
discount I should also amend the VAT to what it would be if it was based on
the old way of doing it, i.e based on the discounted figure. Are they
correct?
 
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P

Peter Saxton

For several years the main supplier of goods for my business has offered a
discount for settlement within seven days. The VAT shown on the invoice was
always 17.5% of the amount due AFTER discount was deducted.
This is correct.
Following the introduction of new computer systems, the invoices now show
VAT based on the full price of the goods sold.
Is the discount still available?
I know that in the long run this doesn't make any difference to me, but it
does have a small implication as far as cash-flow is concerned, as I now pay
more VAT week-by-week, and in effect get it all back only when I make my
quarterly VAT payment.

But it got me wondering: is either method of calculating VAT the correct one
or can they both be used? Someone has suggested to me that when I deduct
discount I should also amend the VAT to what it would be if it was based on
the old way of doing it, i.e based on the discounted figure. Are they
correct?
I'd never recommend altering VAT invoices or entering data into your
accounts amounts different to documents on a regular basis.
 
R

Ronald Raygun

Peter said:
This is correct.
Are you sure? I was under the impression that the (broadly) two
kinds of discount applicable should be treated differently:

If it's a trade discount, e.g. to encourage repeat custom, this is
equivalent to lowering the sale price, and therefore properly the
VAT should be calculated on the reduced price.

Value of goods £1000, 10% trade discount, invoice is for £900
plus £157.50 VAT: £1057.50.

If, on the other hand, it's a settlement discount, to encourage
prompt payment of the invoice, the VAT should be charged on the
full sale price, since the discount is a reduction allowed on the
outstanding account, not on the goods or services sold. Consider
what would happen if instead of an early payment discount there were
a late payment surcharge. This would not be subject to VAT since
it's a kind of finance charge. The early payment discount is really
a negative finance charge, so should involve no VAT refund.

Value of goods £1000, invoice total £1000 plus £175 VAT. Total owing
by customer to supplier: £1175.00. If settled within 4 weeks a 10%
discount is allowed, making the total actually payable £1057.50.

Although the totals payable are the same, the customer, if registered,
can reclaim (and the supplier must pay to HM) £17.50 more VAT than in
the trade discount situation. So offering a 10% SD will cost a VAT
reistered supplier more than offering a 10% TD, and likewise will
benefit a VAT registsred customer more, while making no difference
to a non-registered customer.
 
D

Doug Ramage

Ronald Raygun said:
Are you sure? I was under the impression that the (broadly) two
kinds of discount applicable should be treated differently:

If it's a trade discount, e.g. to encourage repeat custom, this is
equivalent to lowering the sale price, and therefore properly the
VAT should be calculated on the reduced price.

Value of goods £1000, 10% trade discount, invoice is for £900
plus £157.50 VAT: £1057.50.

If, on the other hand, it's a settlement discount, to encourage
prompt payment of the invoice, the VAT should be charged on the
full sale price, since the discount is a reduction allowed on the
outstanding account, not on the goods or services sold. Consider
what would happen if instead of an early payment discount there were
a late payment surcharge. This would not be subject to VAT since
it's a kind of finance charge. The early payment discount is really
a negative finance charge, so should involve no VAT refund.

Value of goods £1000, invoice total £1000 plus £175 VAT. Total owing
by customer to supplier: £1175.00. If settled within 4 weeks a 10%
discount is allowed, making the total actually payable £1057.50.

Although the totals payable are the same, the customer, if registered,
can reclaim (and the supplier must pay to HM) £17.50 more VAT than in
the trade discount situation. So offering a 10% SD will cost a VAT
reistered supplier more than offering a 10% TD, and likewise will
benefit a VAT registsred customer more, while making no difference
to a non-registered customer.
"Early settlement" discounts seem to be a problem for HMRC.

The C&E Manual and VAT Notice 700 state that it is the discounted amount
which the supplier should use as the taxable consideration, irrespective of
whether the customer paid early.

However, C&E argued the reverse in the Saga Holidays case - i.e. that the
discounted amount only applied if the customer actually took advantage of
it - and C&E won!
 
T

Tim

Consider what would happen if instead of
an early payment discount there were a late
payment surcharge. This would not be subject
to VAT since it's a kind of finance charge.
Do you mean something like:
Goods : £900.00
VAT : £157.50
Late payment surcharge : £117.50
=>
If paid early : £900.00 + £157.50 VAT = £1057.50
If paid late : £1017.50 + £157.50 VAT = £1175.00
?

But, for an early payment discount you are saying:
Goods : £1000.00
VAT : £175.00
Early payment discount : £117.50
=>
If paid early : £882.50 + £175.00 VAT = £1057.50
If paid late : £1000.00 + £175.00 VAT = £1175.00
?

Hmmm. The above situations show exactly the same total if paid early
(£1057.50), and also exactly the same total if paid late (£1175.00) -- but
would give you the *choice* as whether to count VAT as £175 *or*
£157.50 -- simply call it either a late payment surcharge (if you want VAT
to be £157.50), or an early payment discount (if you want VAT to be
£175.00).

I must say, from previous posts on here in the past, I thought that the VAT
was £157.50 under the "early payment discount" scenario as well as the "late
payment surcharge" one (and this wouldn't give the invoice issuer any
choice!).
 
R

Ronald Raygun

Tim said:
Do you mean something like:
I just mean that a surcharge would not attract VAT and for that
reason it makes sense that a negative surcharge should not
involve negative VAT.

[examples snipped]
Hmmm. The above situations show exactly the same total if paid early
(£1057.50), and also exactly the same total if paid late (£1175.00) --
but would give you the *choice* as whether to count VAT as £175 *or*
£157.50 -- simply call it either a late payment surcharge (if you want
VAT to be £157.50), or an early payment discount (if you want VAT to be
£175.00).
Well, the costs do indeed look the same, but only from the point of view
of a buyer who cannot reclaim VAT. The buyer pays £117.50 more if late
than if early in both scenarios, and although the seller also nets £117.50
more if late than earlier in both scenarios, he *also* nets £17.50 more in
the surcharge scenario than in the discount one.

Also the two scenarios are not strictly comparable, since the raw sales
value of the goods in one is £100 more than in the other, albeit you've
simply cooked the contrived figures by pre-discounting the basic £1000
with a hidden £100 discount to £900 only then to add a £117.50 surcharge.
What a slime-bag of a trader!
I must say, from previous posts on here in the past, I thought that the
VAT was £157.50 under the "early payment discount" scenario as well as the
"late payment surcharge" one (and this wouldn't give the invoice issuer
any choice!).
I think it does give the invoice issuer a choice, and it seems to be
some kind of concession to allow a pre-agreed early payment discount
to be treated as if it were a trade discount. The case mentioned by
Doug does rather seem to have thrown a spanner in those works, throwing
the whole established procedure into question.

I guess the only safe answer is to go for the TD option plus LPS.
 
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P

Peter Saxton

Are you sure? I was under the impression that the (broadly) two
kinds of discount applicable should be treated differently:

If it's a trade discount, e.g. to encourage repeat custom, this is
equivalent to lowering the sale price, and therefore properly the
VAT should be calculated on the reduced price.

Value of goods £1000, 10% trade discount, invoice is for £900
plus £157.50 VAT: £1057.50.

If, on the other hand, it's a settlement discount, to encourage
prompt payment of the invoice, the VAT should be charged on the
full sale price, since the discount is a reduction allowed on the
outstanding account, not on the goods or services sold. Consider
what would happen if instead of an early payment discount there were
a late payment surcharge. This would not be subject to VAT since
it's a kind of finance charge. The early payment discount is really
a negative finance charge, so should involve no VAT refund.

Value of goods £1000, invoice total £1000 plus £175 VAT. Total owing
by customer to supplier: £1175.00. If settled within 4 weeks a 10%
discount is allowed, making the total actually payable £1057.50.

Although the totals payable are the same, the customer, if registered,
can reclaim (and the supplier must pay to HM) £17.50 more VAT than in
the trade discount situation. So offering a 10% SD will cost a VAT
reistered supplier more than offering a 10% TD, and likewise will
benefit a VAT registsred customer more, while making no difference
to a non-registered customer.
The VAT shouldn't be charged on the full price in the case of an early
settlement discount.
 
T

Tim

I just mean that a surcharge would not attract
VAT and for that reason it makes sense that a
negative surcharge should not involve negative VAT.
But surely, the situation of: (A) a £100 "late payment surcharge" on goods
costing £900(if paid early), is really just the same as: (B) goods costing
£900(if paid early) being £1000 with a £100 "early payment discount"?

So shouldn't the VAT on both these situations be the same? [The only
difference is in the name!]
Well, the costs do indeed look the same, but only from
the point of view of a buyer who cannot reclaim VAT.
OK, let's look at the equivalent scenarios again, with the 'net of VAT'
prices the same :-

Late payment surcharge:
Goods : £900.00
VAT : £157.50
Late payment surcharge : £100.00
=>
If paid early : £900.00 + £157.50 VAT = £1057.50
If paid late : £1000.00 + £157.50 VAT = £1157.50
----
Early payment discount:
Goods : £1000.00
VAT : £175.00
Early payment discount : £100.00
=>
If paid early : £900.00 + £175.00 VAT = £1075.00
If paid late : £1000.00 + £175.00 VAT = £1175.00

Whether it's "£1000 with a £100 early payment discount" -or- "£900 with a
£100 late payment surcharge", the Net-of-VAT figures are the same either
way. So why not the VAT?

Also the two scenarios are not strictly comparable, since the raw
sales value of the goods in one is £100 more than in the other...
Doesn't the actual "final sales" figure depend on whether the customer
actually pays "early" or "late", and will then be the same whether you use a
"late payment surcharge" or an "early payment discount"?

... albeit you've simply cooked the contrived figures by
pre-discounting the basic £1000 with a hidden £100
discount to £900 only then to add a £117.50 surcharge.
What a slime-bag of a trader!
Eh? You think that someone who says "pay £900 early or £1000 late" (late
payment surcharge) *is* a "slime-bag", but the alternative trader who says
"pay £900 early or £1000 late" (early payment discount) is *NOT*?? But
they've both (effectively) said the same thing!!
The case mentioned by Doug does rather seem to
have thrown a spanner in those works, throwing
the whole established procedure into question.
Agreed. That's very worrying - I wonder if there were any special
circumstances in the Sage case?
 
D

Doug Ramage

Tim said:
Agreed. That's very worrying - I wonder if there were any special
circumstances in the Sage case?
Here is an extract by the Vat Tribunal Chairman in the Saga Holidays case -
more contrived language twisting?

"The phrase "the consideration shall be taken . as reduced by the discount"
(emphasis added) means that a reduction is only accounted for when a
discount is granted. In that context the phrase "whether or not the customer
pays promptly enough to qualify for the discount" must be interpreted to
mean that the reduction is still made if a discount is given but the
customer did not qualify for the discount under the terms on which it was
offered."

Also, C&E were not slow to spin the opposite way !

"It is understood that Customs have until now interpreted para 4(1) as
meaning that where a prompt payment discount is offered, VAT is to be
accounted for on the discounted price, whether or not the customer pays
promptly enough to qualify for the discount.

However, the Tribunal cast doubt on that interpretation in this case and
Customs took the opportunity to argue that VAT should only be accounted for
on the discounted price when the discount is actually achieved."
 
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R

Ronald Raygun

Tim said:
I just mean that a surcharge would not attract
VAT and for that reason it makes sense that a
negative surcharge should not involve negative VAT.
But surely, the situation of: (A) a £100 "late payment surcharge" on
goods
costing £900(if paid early), is really just the same as: (B) goods
costing £900(if paid early) being £1000 with a £100 "early payment
discount"?

So shouldn't the VAT on both these situations be the same? [The only
difference is in the name!]
A late surcharge does not attract additional VAT, and I'm saying that
for that reason an early discount ought not to reduce the VAT. That
it appears that in real life it does reduce the VAT (but presumably
only in circumstances where early payment is anticipated with some
confidence and already shown on the original invoice) suggests to me
that either there is a concession operating, allowing a settlement
discount to be treated as equivalent to a trade discount, or that
the rules fail to recognise the logic that a conditional discount is
equivalent to a negative finance charge.
Whether it's "£1000 with a £100 early payment discount" -or- "£900 with
a £100 late payment surcharge", the Net-of-VAT figures are the same either
way. So why not the VAT?
Why not indeed. I think the problem is that pressure to allow an
EPD to be treated like a trade discount arose for precisely this
reason, namely that if applied by the stricter method the VAT would
be higher than it would be if a LPS were used instead. Perhaps it
was thought that traders would shy away from the expedient solution
of always opting for LPS (to minimise their customers' VAT burden)
because it would make them look bad to be shaking a stick. Yet when
instead of shaking a stick they'd wave a carrot it would disadvantage
their customers.
Doesn't the actual "final sales" figure depend on whether the customer
actually pays "early" or "late", and will then be the same whether you use
a "late payment surcharge" or an "early payment discount"?
It's probably more complicated than that. One isn't always in a simple
binary situation where early and late are the only two possibilities.
Generally there will be a "normal" price, say for payment within 4 weeks,
with an EPD offered for settlement within two, and an LPS applying
after 4 (and additional surcharges slapped on every month thereafter).
Eh? You think that someone who says "pay £900 early or £1000 late" (late
payment surcharge) *is* a "slime-bag", but the alternative trader who says
"pay £900 early or £1000 late" (early payment discount) is *NOT*?? But
they've both (effectively) said the same thing!!
Not quite. Let's say for the sake of argument that the slime bag knows
full well that the buyer hasn't a hope in hell of meeting the payment
deadline before which the penalty surcharge would not apply. So he
gives a bogus discount of £100, only to turn it into a £117.50 surcharge.
In effect there was an unavoidable £17.50 surcharge.
 

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