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Calculation of Settlement Discount

I would like clarification on the treatment of VAT in respect of settlement discounts.

Has anyone had difficulty in arriving at the correct answer to the following question within the June 2008 Exam Paper, Section 2 - Task 2.19?

Comments

  • MrKrisMrKris New Member Registered Posts: 6
    I would like clarification on the treatment of VAT in respect of settlement discounts.

    Has anyone had difficulty in arriving at the correct answer to the following question within the June 2008 Exam Paper, Section 2 - Task 2.19?

    Whats the question?
  • mynameislin0708mynameislin0708 Just Joined Registered Posts: 3
    In the answer to this question the workings show that the VAT was calculated on the discounted amount in accordance with HMRC concession.
    If the customer then settles the invoice within the payment terms the discounted settlement amount is applied to the total value of the invoice, however, if the customer decides he does not wish to pay within terms then the answer shows that the customer would pay the total value of the invoice (in which the settlement discount has already been applied).
    I'm having difficulty in understanding the mechanics of this as it would appear that the customer is benefiting from the settlement discount by not paying within payment terms. Can anybody help?
  • NnelilanNnelilan Settling In Nicely Registered Posts: 19
    Hi, I think it's the June 2009 exam, section 2.1.

    Question is :

    For the supply of superior white card 1,000.00

    Trade discount 20% 200.00
    _______

    Net amount 800.00

    VAT at 17.5% 133.00
    _______

    Total 933.00
    _______

    Terms: 5% discount for payment within 10 days



    If the customer then settles the invoice within the payment terms the discounted settlement amount is applied to the total value of the invoice,

    The settlement discount is applied to the Net total, not the total value of the invoice.


    however, if the customer decides he does not wish to pay within terms then the answer shows that the customer would pay the total value of the invoice (in which the settlement discount has already been applied).

    If the customer does not settle within the terms then they are not entitled to the discount - the only 'discount' that has been applied is the reduction of the VAT due.

    Does this help?

    Cheers,
    Dave

    /Edit

    Just to clarify, the settlement discount has not been applied to the net total by the supplier. It's up to the customer to determine the settlement discount and then apply it themselves. The VAT always remains the same
  • mollymoomollymoo Settling In Nicely Registered Posts: 23
    The vat man so to speak is happy with the reduced vat amount regardless of whether the the customer pays within the days or not. You have to work the vat out on the assumption that the customer will pay within the settlement period as vat cannot be re-calculated, the vat people are happy with this, it's one of their rules.
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