VAT on wholesale or trade discount

[Munchkette]

I've just started up as a sole trader, I have not registered for VAT as I'm no where near the threshold therefore I cannot claim back VAT charged on purchases from suppliers which is fine by me.

I am just wondering whether I'm being overcharged VAT by a supplier. They offer a 50% discount for wholesale buyers. The 50% discount is applied to the RRP (inclusive of VAT) then 20% VAT is added to the total invoice amount.

Example RRP (including VAT) £53, Discounted price £26.50, Final price (incl VAT) £31.80

However am I right in thinking the discount should be applied to the RRP net of VAT? Therefore the discounted price of £26.50 should be the final value I pay as this already includes VAT and not £31.80?

By my calculation the net RRP (excluding VAT) is £44.17, applying 50% discount to this gives £22.09
Final price (incl VAT) is therefore £26.51 or pretty much £26.50
The VAT due being £4.42

 

[Toby Willows]

They can discount however they want, as long as vat is charged on the invoice total it’s up to them how they arrive at the net figure.

 

[TheCyclingProgrammer]

As above, it's up to them how they discount it but to answer your question, yes I would expect 50% off to mean 50% off, which means the net discounted value is half of the net value.

 

[Munchkette]

Doesn't seem right that they can discount however they want. Isn't there some kind of standard practice?

 

[Mr D]

Doesn't seem right that they can discount however they want. Isn't there some kind of standard practice?

Yes there is standard practice.
The charging you 20% VAT is standard practice.

How to work out the discount, no there is no standard. The 50% discount applied to RRP then 20% VAT added on is common enough - I can name 3 companies I've dealt with that have done it that way.
Can also think of other companies who do it as you suggest.

At the end of the day if you aren't happy with what you are offered then don't take it. Find a better deal elsewhere.
If you are happy enough with the deal offered then take it as it is. Maybe if you get to be a big enough customer you can try and negotiate.

 

[STDFR33]

Doesn't seem right that they can discount however they want. Isn't there some kind of standard practice?

Why?

It is their business. They can offer whatever discount they please.

 

[Munchkette]

Why?

It is their business. They can offer whatever discount they please.

Actually no according to HMRC and the Association of Accounting Technicians they cannot "offer whatever discount they please". The discount should be applied to the net price of the item, then vat is added to the discounted net price.

How do I calculate VAT for trade discounts?​

To calculate the VAT on a trade discount, deduct the discount from the net price before the VAT is calculated.

 

[Munchkette]

Yes there is standard practice.
The charging you 20% VAT is standard practice.

How to work out the discount, no there is no standard. The 50% discount applied to RRP then 20% VAT added on is common enough - I can name 3 companies I've dealt with that have done it that way.
Can also think of other companies who do it as you suggest.

At the end of the day if you aren't happy with what you are offered then don't take it. Find a better deal elsewhere.
If you are happy enough with the deal offered then take it as it is. Maybe if you get to be a big enough customer you can try and negotiate.

It would appear that those 3 companies you can think of are all doing it wrong, because there is a standard method for applying a trade discount. At least according to HMRC and the Association of Accounting Technicians

How do I calculate VAT for trade discounts?​

To calculate the VAT on a trade discount, deduct the discount from the net price before the VAT is calculated.

 

[DontAsk]

Seven years on and you are still wrong!

Suppliers can calculate discounts however they like.

They give you a "discount price" excluding VAT and you take it or leave it.

 

[paulears]

Your only issue is the maths that is applied to calculations involving multiple percentages. If you decide to offer a 50% discount, that could be a 50% discount on the ex-VAT price, or 50% discount on the tax inclusive price. HMRC do not care - they just expect the final price's VAT content to be paid by you to them.

It's like when people add 20% to £100, and are then amazed when they take 20% off the £120 and discover it is NOT £100.

You expect the revenue to alter the basics of maths to suit your own answer? This is totally and utterly simple. They won't even care if you sell it for less than cost price - but they get the VAT content no matter what.

 

[Newchodge]

It would appear that those 3 companies you can think of are all doing it wrong, because there is a standard method for applying a trade discount. At least according to HMRC and the Association of Accounting Technicians

How do I calculate VAT for trade discounts?​

To calculate the VAT on a trade discount, deduct the discount from the net price before the VAT is calculated.

The net price is whatever the supplier wants to charge you. In this case the net price is £26.50. The fact it has been reached by halving the original price including VAT is neither here nor there as far as HMRC are concerned because the original price including VAT is just a number. It is only VAT when it is added as a % of the net price.