Vat for invoices with early payment discounts

[CG]

Hi

Please can someone check I have understood this correctly.

If an early payment discount of 7% is offered should the invoice issued give goods at the full cost but the VAT calculated on the discounted goods - for example:

Goods - £500
VAT - £93
Invoice Total - £593

And a line should be added to the invoice to say "if payment received within 7 days a discounted total of £558 may be paid"

I thought I understood this from an earlier question (http://www.taxationweb.co.uk/forum/vat-for-invoices-with-early-payment-discounts-t27744.html) but just didn't understand where £97.83 VAT came from in this example).

Many thanks

[Generix]

Haven't looked at the numbers in the old post, but the one in this post look fine.

[Generix]

and yes you have understood correctly

[Chanmuganathan]

How much the customer pays you without discount, £600 or £593?

[Generix]

How much the customer pays you without discount, £600 or £593?

£593 including VAT (£93 VAT) if discount not taken.
£558 including VAT (£93 VAT) if discount taken.
£600 including VAT (£100) if no discount offered.

[Chanmuganathan]

If the customer not taken the discount offered, is HMRC keep loosing £7.00?? Non- VAT registered customers paying 16.5% VAT instead 20%.

What if a business always states the discount and no one take it? Effectively charging less VAT on non VAT registered customers (low price). Seems like win-win situation.
Generix , I know you always right , but I am really confused.

[Kitty Kat]

I've always wondered this too, why not put 'discount of 90% on payments received in £20 notes with all even serial numbers, passed over the counter by a blind midget standing on their head'.

Net £1,000
VAT £20
Gross £1,020

Joe public comes out ahead to the tune of £180 and you get your full net amount.

On a more serious note (as you now have me thinking!), does this work for non-invoice creating businesses? Could my local chippy allow discounts based on some condition (something sensible, like 10% discount for handing in an empty vinegar bottle) given they don't give me an invoice?

[Generix]

If the customer not taken the discount offered, is HMRC keep loosing £7.00?? Non- VAT registered customers paying 16.5% VAT instead 20%.

What if a business always states the discount and no one take it? Effectively charging less VAT on non VAT registered customers (low price). Seems like win-win situation.
Generix , I know you always right , but I am really confused.

I looked at this a long time ago, when I was once was part of a project looking at how this could be exploited in the B2C sector, and we did come up with a way which we thought was possible - however this was around the time all the big retailers were being stung for using the debenhams scheme and were as a result quickly put off of any VAT planning like this, so it was abandoned.

Let me have a quick look at the rules and remind myself what the main obstacle was, might have just been a case of commercial risk outweighing the VAT saving...i.e if you offer 90% discount off the net price, then a lot of people would want to make sure they get the 90% discount and would go to silly lengths to get it. Things like this remind me how terribad my memory is!

[Generix]

Quickly thinking I think the main problem was a lot of our targets were using bespoke retail schemes which handled any discounts as part of the retail scheme calculation (and therefore pretty much worked on a VAT on consideration received basis)...I will have a look later today or tomo and also see if I have a copy of the work we did on my pc at home.

[Generix]

Having looked at the law, it's not ringing any obvious bells as to what the problem was which we went to counsel on.

VATAs19 gives rules on valuation, then Sch6 p4 gives the vires for the prompt payment discount. All seems very clear. (re the case of Saga holidays (only Tribunal so no precedent set) I'm not quite sure how the trib came to their decision, putting the weight on the words ("reduced by the discount") but ignoring "whether or not payment is made in accordance with those terms".)

Re the disclosure, a VAT invoice must include details of any cash discount offered, however, B2C supplies do not require a VAT invoice to be issued.

Kitty > Also note that prompt payment is the only type of conditional discount which this treatment applies to - therefore adding other conditions to the prompt payment might jeopardize this treatment, which would mean the VAT reverts to the normal valuation rules and would be based on net consideration received, i.e. so discount only applies if taken/received.

Which leads me to believe the technical issue was something to do with valuation/retail scheme calculation and the commercial side of it, i.e. in a retail environment you pay immediately anyway, therefore it would be whether prompt payment could also apply to pre-payment and how far in advance it could/would have to be made, and also much like Debenhams how to make it clear to the customer the discount was available etc. I remember that the final idea was not very commercially friendly and therefore not taken up by anyone, albeit it wasn't 'sold' very hard to clients.