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Settlement discounts

debbieb1976debbieb1976 New MemberRegistered Posts: 13
Can anyone tell me why VAT is calculated on the invoice amount (net price) after the deduction of the settlement discount? Does this mean the customer can have this small reduction in VAT even if they decide not to accept the settlement discount offered. Thanks. Hope this makes sense


  • debbieb1976debbieb1976 New Member Registered Posts: 13
    thanks paul
  • debbieb1976debbieb1976 New Member Registered Posts: 13
    I understand this example on the link but the one I have in my foundation NVQ book (P.36) does not state an amount at the bottom like the example on this link. It just says 2.5% settlement and there is also a trade discount. Should the customer be taking 2.5% off the original cost before any discount has been given or should it be 2.5% after the 10% trade discount has been taking off. Its confusing me.
  • welshwizardwelshwizard Trusted Regular South WalesRegistered Posts: 465
    Try this routine for dealing with discounts:

    Do in this order:

    1) Find total cost of goods before any discounts

    2) Take off any bulk discount

    3) Take off any trade discount

    4) The figure you are left with is the net total

    5) Next subtract the % amount of the cash settlement discount from this figure

    6) Work out the VAT on the resulting figure

    7) Add VAt to the Net total calculated in (4)

    This is the figure that goes on the invoice (or credit note)

    Hope it helps you
  • debbieb1976debbieb1976 New Member Registered Posts: 13
    Thanks, I can follow that. I know how to get the total including the settlement discount on the VAT for purpose of the invoice. What I need to know is if the customer decides to accept the settlement discount, how do they calculate what discount they are entitled to as the invoice amount is assuming they pay it in 30days. Or am I wrong?
    What figure does the customer deduct the settlement discount from?
  • fatandfortyfatandforty Experienced Mentor Registered Posts: 553
    Settlement Discount

    This is the one area where the tax man gives us a break! You still take the VAT at the lower price even if you can't take the settlement discount. If you are going to take the settlement discount you just deduct the percentage allowed from the net amount. Hope this helps.
  • debbieb1976debbieb1976 New Member Registered Posts: 13
    Thanks. Thats great. All examples I have seen of a settlement discount on the internet stated the settlement discount if taken at the bottom. It didnt say the percent but stated the actual cash amount e.g. £5 or £10. The one in my book just said the percentage (2.5%) and assumed the customer would calculate it.
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