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Hi
Just wondered if any one could clarify settlement discounts:
Goods £50.00
Discount for payment within 10 days 2%
1. Discounted Amount £49.00 is the VAT calculated on this amount?
2. Original cost £50.00 or is the vat calculated on this amount?
Any help would be appreicated (please note this is not an exam question),
I have completed and passed Level 1 Manual and Level 2 Computerised.
I am sitting level 2 Manual next week, but the mock exam does not include discounts so I assume the exam will not.
Kind Regards Helen D
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Hi Helen
On the assurance that this is not an exam question (and we will both be in trouble if it is ) the answer you require is this:-
WITHOUT DISCOUNT
Cost of goods/service £50
VAT @20% £10
Total of invoice £60
WITH A SETTLEMENT DISCOUNT @2%
Cost of goods/service £50
VAT £ 9.80
Total of invoice £59.80
If the invoice is not paid within the discount period no change is made to VAT.
If it is paid within the discount period then the discount (£1.00) is dealt with in the discount allowed ledger (account).
Geoff
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Hi Geoff
Thank you for your response.
With a trade discount the vat is calculated on the net price after discount which in this case is £49.00
As far as I am aware with a settlement discount the VAT is charged on the un-discounted amount, which in this case is £50.00.
If the cusotmer takes advantage of the discount, the customer will pay 49.00 NET and £10.00 VAT the £1.00 discount will be entered in both the customers account to balance the account and in the discounts allowed.
If the customer does not take advantage of the discount then the transaction would go through as £50.00 NET and £10.00 VAT.
I have had conflicting information on this and this is why I am asking the question to clarify the correct way of accounting for settlement discounts.
Correct me if I am wrong on this but according to my study manuaul this is the way to do it, although other information is contradicting and and show the VAT is charged on discounted amount, which as far as I am aware is trade discount accounting.
Sorry this is very longwinded, just me to get this clear in my own mind
Kind Regards Helen
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- Fellow
- Practice Licence
- 27 posts
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Hi Helen
Correct me if I'm wrong, but, you appear to be confusing trade discount and settlement discount.
Geoff has answered your question correctly with regard to early settlement discount. The VAT is calculated assuming the the invoice will be paid within the "early settlement" period. If the invoice is paid outside this period then the full net amount is paid plus the vat as stipulated on the invoice i.e. £9.80 plus £50. If paid within the discount time frame the amount due will be £49 plus £9.80. In this scenario the invoice should read net £50 Vat £9.80
With trade discount, the net is calculated reflecting the discount offered and the vat is then calculated on this price and the invoice total is due regardless of when it is paid. In this case the net should read £49 vat £9.80.
I hope this helps your understanding.
When I was teaching bookkeeping this was an area that a lot of students struggled to understand.
Kind regards
Lynne
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Hi Lynne
Thank you for your reply.
In my study manual a settlement discount is caluclated in the following way based on 17.5% VAT:
NET Amt. £500.00 x 2% = £10.00
Therefore: £587.50 - £10.00 = £577.50 Customer would pay this amount (if taking discount)
Made up of the following
Goods £500.00 - £10.00 = £490.00
VAT £87.50
Total £577.50
CREDIT Supplier Account £587.50
Therefore the VAT is calculated on the full Net Price.
When the bill is paid a cheque is issued:
CREDIT Bank £577.50Chq 100150
DEBIT Supplier Account £577.50 + £10.00 Disc Taken
DEBIT VAT £10.00
CREDIT Dis/Taken £10.00
I assume from your information this is not correct?
Kind Regards
Helen
Edited at 29 Oct 2011 08:55 PM GMT
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Hi Helen
I'm a little nervous about answering in case I get it wrong and/or confuse you.
From my understanding, the price you quote on the invoice is the price the customer must pay regardless of whether the discount is taken. As you're talking about the settlement discount (not trade discount), the discount amount does not show on the invoice.
So, if the invoice is for £500 with no settlement discount the invoice would show £500 + £87.50 (VAT @17.5%) = £587.50
The invoice with settlement discount would show £500 + £85.75 (VAT @17.5% on £490) = £585.75
The reasoning is that should the customer pay within the settlement period they would have paid too much VAT.
In the event this info is incorrect, I'm really hoping I'll be corrected as it will mean I have to revise this part again!!
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Hi Infinite
I appreciate your reply. (I see you have based the VAT on the undiscounted NET as per my example)
If the customer does not pay within the specifed time, based on discount VAT:
Eg 500 - 2% 490 x 17.5 = 85.75
Total 577.75
Then the company will surely have saved VAT, so are settlement discounts in fact a way of saving VAT, as pointed out on an earlier post, the customer will pay 277.75 regardles or whether they pay in the specified time or not.
I think there are VAT rules around this and I have even read that, the discounted amount of 10.00 is classed as a finance type charge and is not subject to VAT. This would explain the calcultion of the NET discounted figure before VAT.
Although if a company was frequently using settlement discounts and not all customers taking advantage, their OUTPUT VAT would be decreased.
I may be wrong on this one as I do not claim to be an expert on VAT
Kind regards
Helen
Edited at 29 Oct 2011 04:30 PM GMT
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Lynne
Thank you for confirming my response as being correct. i stick by my answer and as you say it is an area that causes confusion as I am also now finding out through lecturing.
BTW - as the current rate of vat is 20% Helen you should use this otherwise more confusion will creep in as you will not be able to compare like for like figures.
The discount is NOT finance charge and should be properly recorded in the accounts as discount allowed (or received).
Geoff
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Hi Geoff/Lynne
Thank you for all your assistance.
I have checked on the HMRC website and I am now assured by both of you and the HMRC that the VAT is calculated on the discounted price.
The worrying part is my training manual differs, I have emailed the tutor to let her know, hoping this may help future students.
Once again thank you.
Kind regards
Helen
Edited at 29 Oct 2011 05:33 PM GMT
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Hi Helen,
I'd be interested to hear what they say. Which training provider are you studying with?
Ray
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Hi Ray
It would not be professional for me to disclose information regarding my training provider.
The manual includes
Trade Discount -
Calculated on the Discounted NET Price
And Settlement discount
Which is calculated on Non-Discounted NET Price
And the % Discount is taken from the NET Value of the invoice when payment is made.
As far as I am aware the settlement discount is based on the NET Value minus the Discount and VAT is calculated on that amount.
So the NET Price stays the same and the VAT Changes. I have finally got my head round it I think!
Kind regards Helen
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Helen
Well done on recognising the implications of putting the learning providers name in a posting. Keep it up.
If you have quoted verbatim then I can agree that it is not too clear. I had to rewite a tutorial recently on this very subject as I found that my students had misinterpreted the position.
Even so I still found some who came up with the wrong answers in a test which shows how confusing this subject is.
Most people who have a problem cannot get their heads around the fact that even if the discount is not taken the purchaser pays a lower amount of VAT. It's just the way it works.
Geoff
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Hi Geoff
Thanks for your reply. I do understand it now, I would have understood it in beginning if I was given the correct information.
I revisited my study manual, as I was word processing my notes and when I came to the discounts section something didn't seem to fit, I never noticed the first time I looked this section, but after gaining more knowledge and revisiting it I had to clarify it.
Thank you again.
P.S I would never mention any names on this forum.
Kind regards
Helen
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Hi all.
I have just had a small argument with a supplier about this topic.
The lady I spoke to was absolutely adamant that an invoice for £100 with a settlement discount of 10% would read (based on 20% vat);
Net £100
Vat £ 20
Gross £120
if the £10 discount was taken the £110.00 would be paid.
I really stuck to my guns on this one, especially after she tells me she has 20 years experience, so the fact that I know she was wrong and someone like me, with just a measly 7 years experience and AICB (nearing MICB) under my wing, just fuelled me even more! I insisted that the invoice would read;
Net £100
Vat £ 18
Gross £ 118
if the £10 discount was taken the £108.00 would be paid.
Regards
Kerry
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Well done Kerry.
Nothing measly about seven years - or even seven months, one of the big debates on the forum is qualification and experience and on this one it looks like you had both to back up your opinion (plus of course the forum from the Professional Institute of The Year)
Geoff
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Thanks Kerry you have clarified this subject for me as well as other members
Kind regards
Helen
Edited at 01 Nov 2011 04:17 PM GMT
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Please ignore this I replied again and cant delete it
Edited at 01 Nov 2011 04:18 PM GMT
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