Discounts An explanation of discounts and the implications to tax

Methods of discounts Goods are sold at a standard or list price A business does not always have to charge the full price it can offer a discount. There are 3 discount types – Trade – Bulk – Settlement/ cash

Trade discount A percentage reduction from the list price. Can be offered where: – The customer is regular and valued – An incentive for new customers – The customer is in the same trade. The trade discount is shown on the invoice as a deduction before calculating a net total and VAT calculations

Bulk discount A percentage reduction from the list price offered where a large order is placed. It is offered to encourage customers to place large orders thus reducing the admin costs. The higher the quantity the higher the percentage rate The bulk discount is offered in addition to the trade discount The discount is shown on the invoice as a deduction before calculating the trade discount, net total and VAT calculations

Settlement discount A percentage discount offered to credit customers to encourage early settlement of a debt It is not shown on the invoice as customers do not have to take the discount The discount value is shown on the bottom of the invoice as an indicator The discount is calculated on the net total and VAT is calculated on the net less the discount deduction The VAT is added to the original net value shown on the invoice not the discounted value.

VAT VAT is the duty charged on sales (taxable supplies) The duty is collected by HMRC Sales tax is known as OUTPUT TAX Purchase tax is known as INPUT TAX Businesses that pay tax can reclaim the purchase tax Every 3 months the business complete a VAT return showing the input and output tax If output tax exceeds input tax the difference is paid to HMRC If input tax exceeds output tax the business is due a refund from HMRC

Rates of VAT Standard rate 20% - most items – A business that charges output tax can reclaim the input tax on expenses & purchases Zero- rated – food stuffs, children’s clothing and books & magazines – A business that charges 0% output tax can reclaim the input tax on any expenses Exempt – postal services & rail travel – A business that can’t charge VAT cannot reclaim the input tax

Calculating VAT VAT must be charged accurately Common practise is to round down VAT to 2 decimal points Calculate VAT on the net value Where settlement discount is offered, calculate VAT on the net less percentage deductions Calculate the VAT from the gross by dividing by 120, multiple by 20

Calculate discounts & VAT Exercise Kitchen Pantry sold goods to Pots & Pans to the net value of £ Calculate the VAT value at 20% and the total invoice value. 2.Using the same net value, Kitchen Pantry offered Pots & Pans 10% Trade discount, calculate the revised net value, VAT at 20% and the total invoice value

Calculating – continuation 3.Using £ as the product value, Kitchen Pantry offer 5% Bulk discount for the quantity ordered, then 10% Trade discount as a loyal customer, calculate the revised net value, VAT & invoice total. 4.Still using the £ Kitchen Pantry now offer Pots & Pans settlement discount of 3%, if paid within 15 days. They still offer the 10% trade discount on the value. Calculate the revised net value, the VAT charged on the lesser net value and the total invoice value. 5.How much could Pots & Pans save if they pay within the 15 days?

Solutions x 20% = , – Invoice total = £ – 10% = = x 20% = – Invoice total = £ – 5% = – = % = = x 20% = – Invoice total = £

Solutions – continuation – 10% = – = % = – = x 20% = – Invoice total = £ – Or x 97% x 20% = The settlement discount value would be £25.38 and Pots & Pans would pay £ which is – 25.38