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.
- Do I need to pay my accountant 805 11
- Joining the flat rate scheme retrospectively 1,088 12
- LLP members transfer to limited companies. 98 1
- What is the status of "Whistleblowing" these days - do you get rewarded? 637 20
- Audit 75 1
- carry back of gift aid 166 3
- Employee to move to Isle of Man 290 8
- Uncomfortable with some advertising Sift takes 465 13
- Awkward IP 1,147 12
- What's in a name ? 934 8
- Straightforward email correspondence or PDF letter attached to blank email? 838 10
- Negligible value - JJB Sports 173 1
- Buying Microsoft's Surface Pro 3 551 11
- Is it possible to change a client's trading address for Vat purposes online 227 3
- Should everyone be entitled to a personal allowance 378 6
- Potentially dodgy client 394 3
- CIC Tax - what is trading? 558 28
- Entrepeneurs relief 455 18
- French Excise Duty - Help Please! 399 9
- Goodwill omitted from first years accounts 540 23
- CTA study material 782
- Anyone have clients that use Pay4Later to offer customers credit? 484
- Raiders of the Lost Tax File 424
- Employment related securities question 313
- AIM Stocks and IHT 290
- Expat pension contributions? 267
- Tax Relief for overseas employees 264
- Trust for Employee 247
- Service Charge Accountant Career Options 200
- IPP (International Pension Plan) income 151