Settlement Discounts

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT member discussion
I am a bit rusty on Settlement Discounts for clients bookkeeping needs.

Am I right in understanding the VAT guide to say that a client can offer a settlement discount. This will calculate VAT at the discounted rate? e.g. Invoice net = £100 Dsicount 25% means VAT = £13.13 Invoice Total = £113.13 regardless of when they pay?

As I say, I am very rusty on this subject. I last looked at it in Foundation stage 6 years ago.

I look forward to help.

Thanks
Ben Elliott

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Settlement Discounts

    Hi Ben

    You are correct in your assumptions that VAT is calculated on the discounted amount regardless of when the customer pays the invoice.


    Regards
    Michelle
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Settlement Discounts

    The 25% in your example is quite a lot for a settlement discount. Settlement discount is an incentive to the customer to pay earlier than the normal credit terms - the supplier can justify this additional small discount because it helps with cash flow and helps to reduce the risk and hassle of overdue accounts.
    For example the supplier may accept settlement discount of 2% if the customer pays at 20 days instead of the agreed terms of 30 days. Even if the customer pays late, and still takes the settlement discount, the VAT does not change.
    NET sales £100
    2% set disc £2
    Vatable amount £98
    VAT £17.15.
    The difference on output VAT is only 35p.


  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Settlement Discounts

    Thanks. I only used 25% as a working example but I am grateful for your help. I couldn'y remember how much the customer paid after the deadline.

    Ben

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