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VAT and settlement discounts imposed

Is this VAT treatment dodgy?

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We have a large newish customer who has told us that they take 5% automatic settlement discount on all purchase invoices. We told them we would prepare invoices to take account of this which would state that the VAT claimed should be restricted to the amount actually paid.  They said they were not happy with this. We suggested issuing them with credit notes to account for the difference.  They didn't like this either. They told us that their suppliers all made their own internal  adjustments to account for the discount.  We ended up agreeing to manage the discounts via a retrospective discount, which solves all the VAT questions.  But am I right in thinking that they are effectively overclaiming VAT and that this is potentially fraudulent? 

We're not going to continue supplying them, so this is academic for us, I think.  But I would be very interested to know the answer, especially as this is a high-profile business which courts publicity.

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RLI
By lionofludesch
13th Feb 2020 16:57

You're right.

Report these thieves to HMRC.

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By SXGuy
13th Feb 2020 17:09

Vat should be applied after discounts as far as I'm aware.

Otherwise as you say the vat element ends up greater than it should be

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By Wanderer
13th Feb 2020 18:16

Nope.
All changed with effect from 01/04/2015.
VAT should be calculated on the sales invoice on the amount BEFORE settlement discount is applied.
Customer should then restrict their input tax to reflect the fact that they took settlement discount.
Supplier then has to do the same.
https://www.gov.uk/hmrc-internal-manuals/vat-valuation/vatval08500

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Replying to Wanderer:
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By nippy1
14th Feb 2020 10:17

It looks as if thecustomer is claiming VAT on the full undiscounted value. The supplier then issues a credit note for the discount, and this ensures that the supplier has accounted for VAT on the discounted value in their books. But my understanding is that the customer simply ignores these credit notes and doesn't post them. So the customer's input tax will actually be higher than the supplier's output tax.

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By Wanderer
14th Feb 2020 10:28

It's actually okay to claim the full amount of VAT initially, but then the customer needs to adjust when paid / a credit note received. Wouldn't surprise me if they are 'overlooking' said adjustment however it's quite a leap to go from suspicion to understanding and fraudulent.

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Replying to Wanderer:
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By nippy1
14th Feb 2020 10:54

I agree. But what they have written to me is the following:

'Our usual process is making a deduction at time of payment then our suppliers raise an internal credit note to account for the discount.'

To me, the term 'internal credit note' implies that the only adjustment after the discount is on the supplier's side and that none is made by the customer.

I suggested to them either credit notes (real ones, not just internal ones!) or HMRC approved format invoices stating that any VAT claim was restricted to the value actually paid after discounts were claimed. Their exact words were 'Unfortunately the process you have mentioned below doesn’t work for us.'

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By Wanderer
14th Feb 2020 10:58

Okay then make sure that for any future transactions that you either
a) adopt option 1 AND send your customer the credit note or
b) adopt option 2 AND include the suitable wording on your invoice.
send them the link I gave you if they continue to argue. It's not up to them to dictate your processes / ignore what HMRC say just because it 'doesn't work for them'.

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By nippy1
14th Feb 2020 10:57

Sorry; I've just edited my post above before your reply!

I did suggest both of these and they said neither option would work for them. This is what leads me to think that it's actually their policy to claim more VAT than they have actually paid, and more than the supplier declares.

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Replying to Wanderer:
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By nippy1
14th Feb 2020 11:12

We've stopped doing business with them, and we never had any settlement discounts through their methods either. But the more I think about it, the more dodgy it feels! And as I mention, it's a high-profile business which doesn't treat its suppliers particularly well.

The latest set of accounts has Cost of Sales of just under £16m, so the VAT overclaim is potentially quite significant!

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