100% settlement discount? Is there such a thing!

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JasonTurbo
JasonTurbo Registered Posts: 27 Epic contributor 🐘
in Chat and off-topic discussion
Whilst in the classroom studying BA1 a few weeks back my friend had an idea about 100% settlement discounts, thus in theory avoiding any tax liabilities? Surely this is illegal right? If not everyone would be doing it, anyone care to enlighten me on this so I can tell him.

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  • KaySarah
    KaySarah Registered Posts: 215 Beyond epic contributor 🧙‍♂️
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    If you had 100% settlement discount .. you wouldn't be paying your supplier anything and he'd be giving the goods away for free .. not exactly sound business practise :ohmy:
    Maybe I'm missing the point .. even if we were all to go back to the Bartering System .. HM Inspector of Taxes would still demand his share :huh:
  • johnnyboy987
    johnnyboy987 Registered Posts: 36 Epic contributor 🐘
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    So what you are saying is offer 100% Settlement Discount so there will be no VAT liability (VAT is calculated on the assumption that all discounts are taken)... I'm not sure about the legalities of it but it would be a pretty stupid idea.

    How would the supplier not take up the offer? If you offer 100% Settlement discount, then you will never get paid. As soon as the invoice is raised, the invoice is technically already settled because there is nothing to pay if you are taken up the offer. No money to the tax man but none to you either!
  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
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    The settlement discount has to be a genuine discount. If you want to risk giving things away for free so your non-VAT registered customers can save the VAT (and, apparently, everything else) then go ahead...!! Like Johnnyboy says, if it was a 100% discount, then all customers would automatically take up the offer. If it was a 95% discount then they would have to pay the 5% in time but it's still a huuuuuge risk :wink:

    No idea what HMRC would say but I'm pretty sure there's some anti-avoidance rules along these lines already.
  • KaySarah
    KaySarah Registered Posts: 215 Beyond epic contributor 🧙‍♂️
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    johnnyboy987 wrote: »
    So what you are saying is offer 100% Settlement Discount so there will be no VAT liability (VAT is calculated on the assumption that all discounts are taken)... I'm not sure about the legalities of it but it would be a pretty stupid idea.

    How would the supplier not take up the offer? If you offer 100% Settlement discount, then you will never get paid. As soon as the invoice is raised, the invoice is technically already settled because there is nothing to pay if you are taken up the offer. No money to the tax man but none to you either!

    Also ... If you are VAT registered, I don't see what the problem would be in the first place ..:001_unsure: you will be claiming back the Input Tax and only paying over the difference which you have collected on behalf of HMRC anyway ..
    I think someone has been pulling your leg to guage your reaction :blushing:

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