early settlement discount (Finance Act 2015)


I am a bit confused about the early settlement discount. I think the way it works has changed recently, but I don't understand the new system.

Supposing that a supplier makes a sale for £5000, with a 25% trade discount and a 5% early settlement discount for payment within 15 day, my understanding is that the invoice will show the following amounts:

Net £3750 (after trade discount)
VAT £712.50 (calculated after trade discount and early settlement discount ?)
Gross £4462.50 (the sum of the two)

My questions is how much VAT will the customer pay for late payment (after 15 days) ? £750 ?

Thank you so much for your help
I'm taking the exam soon

Best Answer

  • Jules18
    Jules18 Settling In Nicely Registered, Tutor Posts: 102
    Accepted Answer
    The system of early settlement discount has changed in the UK to come in line with the rest of the EU but the AAT exams will still use the 'old way' until the new syllabus comes in in September - I assume to save rewriting the question bank. The system is that whether or not the payment is made early the VAT stays the same as if discount is taken.

    You are right to calculate this as £5000 x 25% Trade discount = £3750.00 net with VAT worked out as £3750 x 95% x 20% = £712.50 giving a gross of £3750.00 + £712.50 = £4462.50 to be invoiced. If they pay early or late the VAT remains at £712.50.

    Next year it is going to all credit note adjustments!!!

    Hope this helps


  • Jules18
    Jules18 Settling In Nicely Registered, Tutor Posts: 102
    Sorry I should have said I am assuming this is the ITAX exam you are taking soon.
  • FrenchLady
    FrenchLady Registered Posts: 12

    Yes, I'm about to take the ITAX exam.
    Thank you so much for your answer, it clarifies things a lot !

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