BA1: Settlement Discounts

Chan110

Hi,

Have re-read this topic and the examples in the books several times and I just cannot get my head around how it works.

For argument sake, let me explain simply what I understand:
1. To calculate invoice with Trade+Settlement discount
- Total NET price : Qty x Unit Price = (A)
- Trade Discount : (A) x %Tdiscount = (B)
- NEW NET price : (A) - (B) = (C)
- Settlement Discount : (C) x %Sdiscount = (D)
- FINAL NET price = (C) - (D) = (E)
- VAT : (E) x %VAT = (F)
- INVOICE total : (C) + (F) = (G)

So, Customer would pay (G) - (D) if within settlement period, else pay (G).

But, why INVOICE total = (C)+(F)=(G)?!!!
Shouldn't the invoice be:
VAT : (C) x %VAT = (F1) and therefore invoice = (C) + (F1)?
And if customer pays within settlement period, then they pay:
VAT : (E) x %VAT = (F2) and invoice = (E) + (F2)?

Or is this how's its always been done and we just have to live with it?

Pls help, I am tearing my hear out on just this topic area for days!:confused1:

SarahJS

It's just the way it's done I'm afraid.

For the sake of VAT, HMRC assumes the settlement discount will be taken, hence always charging the lower amount of VAT.

Chan110

Thks Sarah,

That makes perfect sense now!
I will just have to remember that's the way it is...and there is no logical answer to why.