A customer is due a £60 loyalty credit based on past purchases of goods from us. It is our own loyalty scheme -- there are no third parties involved. Rather than giving them a discounted price on the previous purchases, we promised a credit off their next purchase. Ignoring the loyalty credit, their next purchase comes to £200 + £40 vat, £240 in total.
Should we invoice them:
a) £140 + £28 vat = £168 or
b) £200 + £40 vat = £240 from which we collect only £180?
Related resources
Replies (9)
Please login or register to join the discussion.
Thanks Democratus. The credit was based on net: £5 credit for each unit of goods previously purchased.
So it's a net discount deferred....does that help you?
Try walking through the entries up to the point of generating the credit.
If you had granted the discount at the original point of sale what VAT would you have charged?
Thanks again Democratus. I think I see the answer now.
If I go back to the original purchase, the credit was generated by purchasing 12 units, each worth £5 credit against a future order. If we'd given the discount on the original purchase, the net price would have been lower by £5 per unit, and the output VAT £1 lower per unit (£12 in total).
So, if we apply this to the next sale, we'd reduce the net price by £60. The output VAT would be reduced by £12, which is the same reduction as it would have been if we'd applied the discount to the earlier transaction.
Therefore, in terms of the question I posed, we'd issue an invoice on the next £200 sale for £140 + vat.
That's what i'd do......hopefully it's correct. maybe someone else will join in. Vat is a b***ard!
The way ive always believed credit should apply is net of vat.
Its not a credit note in the sense of a refund, its a loyalty discount on next purchase
Your basis for calculating the credit should have been also based on net of vat.
That way, vat is always applied on the very last sub total.
Net Cost
Less Discounts
Plus Postage/shipping
Sub Total
Plus VAT
Grand Total.
Looked at in a simplistic, non-technical way, it might be looked at like this:
On the original sales, you accounted for output VAT on the full sale price - say $20 on a $100 (net) sale;
You're now effectively refunding part of the net $100 to the customer;
You must be entitled to credit for the appropriate part of the $20 output VAT you've already paid over;
You're obtaining this credit by reducing the output you're now declaring.
(Sorry about the dollar signs - my computer's playing up)
Many thanks for your answer, George. The simpler the better as far as I'm concerned. Very helpful.