VAT & Early Settlement Discount

[scedminc]

Hi,

I have a customer which we offer an early settlement discount if they pay within 30days.

Basically they are invoiced the total amount due and if they send payment within 30days of invoice date they take off 7.5%.

We have been paying the VAT on the total amount of the invoice even when the discount is taken off.

Can anyone tell me if we are able to claim the vat back if the early settlement is taken advantage of???

Many Thanks.

 

[David Griffiths]

You've been doing things the wrong way. If you offer early settlement discount then you should calculate VAT on the price net of discount - even if the discount isn't taken.

For example, on an item for £100 the VAT is 17.5% of £92.50 = £16.19 and the total invoice is £116.19. The terms should make it clear that the customer discount is limited to 7.5% of the net price. The VAT won't change even if the customer doesn't take the discount.

I suspect that you are stuck with the VAT that you have charged if you've been invoicing for £117.50 - as you've given out a VAT invoice for that amount, then I would expect HMRC to insist that you stump up the money. As ever, there are people on here who are specialists in VAT and I would bow to their superior knowledge.

Finally, as a comment to those who see the offering of cash discounts as a jolly wheeze to get the VAT down, be aware that HMRC will look very closely at the reality of the situation and if they think that it's a sham then they will put a swift stop to it!

 

[scedminc]

Oh dear, I was afraid you might of said something like that. Thanks for your help.

Hopefully some VAT guru will come along and save the day and suggest that I can claim the over paid VAT back as there is alot to claim.

Many Thanks.

 

[Kevin Hall]

It seems that you have overcharged VAT to your customer. You need to restore your VAT account to the position it should have been in. You can only correct errors going back 4 years. But in essence, you can reclaim from HMRC the overpaid VAT.

However, HMRC will be concerned with "unjust enrichment". You cannot simply reclaim the VAT overcharged, you also have to make good with your customer: you would have to repay to your customer the reclaimed VAT that you overcharged to them. If you can prove to HMRC that this will be done, you might be able to make a claim; and if your customer is not VAT registered, they might be very pleased with you.

Hope it helps?

 

[scedminc]

It seems that you have overcharged VAT to your customer. You need to restore your VAT account to the position it should have been in. You can only correct errors going back 4 years. But in essence, you can reclaim from HMRC the overpaid VAT.

However, HMRC will be concerned with "unjust enrichment". You cannot simply reclaim the VAT overcharged, you also have to make good with your customer: you would have to repay to your customer the reclaimed VAT that you overcharged to them. If you can prove to HMRC that this will be done, you might be able to make a claim; and if your customer is not VAT registered, they might be very pleased with you.

Hope it helps?

Hi,

Thats great however is it really worth doing as I will reclaim the vat but just give it to all to my customer anyway??

Thanks

 

[Kevin Hall]

Only if your customer is not VAT registered and will spend more with you in future as a result.

Otherwise, it might be wise to disclose the error to HMRC (to avoid a hefty penalty being imposed in the future) and suggest that no changes be made, if it is not possible for you to pass on the reclaimed VAT to your customers.

 

[DFL Accountants Ltd]

I believe that strictly speaking you should contact the customer(s) and discuss with them issuing credit notes for the original invoices and re-issuing the correct invoices, you will then owe them money which could either be paid to them or taken as Credit against future invoices - hopefully they will be OK with this.

If your customers are VAT registered they will have overclaimed their Input VAT originally and will need to adjust their next VAT returns appropriately, or complete form VAT 652 if the VAT overclaimed exceeds £10,000.

The issuing of Credit Notes and re-issuing of the correct invoices will generate an Output VAT refund due to you. If this is less than £10,000 you can recover this on your next VAT return without notifying HMRC of the error.

I believe you can only go back 3 years, not 4? but they do keep on changing these rules.

 

[David Griffiths]

, you will then owe them money which could either be paid to them or taken as Credit against future invoices - hopefully they will be OK with this.

.

Not necessarily If the customer has applied a discount to the whole invoice,payment against a £117.50 invoice would be £108.69

The correct invoice should have been for £116.19 and the discount £7.50 giving a net payment of £108.69. No money owed to customer but £1.31 reduction in VAT.

The rules on the three year limit were changed with effect from April 2009