VAT when customer imposes their own early payment discount
I have a client who makes supplies to a large company.
The customer has recently written to my client to say that they have changed their terms and conditions and will deduct an early payment discount varying from 5 - 3% of the net invoice amount dependent upon when they make payment. This is a customer imposed early payment discount, not one which my client has offered. They have no choice but to suffer this discount or cease trading with the customer.
E.g. For an invoice showing a net invoice amount of £1000 and VAT £200 the customer deducts 5% of the net amount, i.e. £50, and therefore pays £950 plus the full VAT amount of £200 = £1,150.
If my client had offered this discount in the first place the VAT paid would have been calculated on the discounted amount and disclosed correctly on the invoice.
However, in the above instance how is the discount treated for VAT purposes?
My client does not know what discount will be applied, as it is dependent upon when the customer decides to pay the invoice, so the invoice cannot show the VAT on the discounted element.
Therefore is the VAT £200, despite this then being a rate in excess of 20%, and my client suffers the full cost of the fact that the customer has applied its own discount whilst HMRC doesn't lose out. Or can you treat the discount as an underpayment (or bad debt) and so calculate the VAT to be paid to HMRC as 1/6 of the total payment made, i.e. net value £958.33 and VAT £191.67.
Any advice would be most appreciated.
- Letter to HMRC over 3 months ago, still no reply 1,872 19
- Companies House paper incorporation - date of birth omission 209 4
- Turnover on a tax return 111 7
- incorrect old p60 371 9
- US company hiring UK citizens in UK 222 3
- VAT refund 98 1
- Is there an AIA calculator anywhere 181 1
- Reclaiming VAT on refurbishment cost? 253 3
- Missing tax return 359 4
- Are you going to Tick and Bash on 21 May? 1,090 30
- Inflation and fees 1,389 24
- Sage Priority Support 177 3
- Cost of demolition of a shed - revenue or capital? 833 24
- Micro-entity accounts 258 1
- Related party disclosure 216 3
- Company reconstruction 153 1
- Rolled up interest and late interest rules 240 6
- US LLC - anomaly in UK and US treatment 160 3
- Basic Tools and PAYE succession 180 1
- Advice please! 427 2