Related article: What happens if you pay VAT to HMRC but never receive the VAT back from your client? You may be able to reclaim the VAT.


Quiz: Do you understand VAT on discounts?

Try this quiz to see if you can calculate VAT on discounts. To answer, check a tick box against one of the options below and click submit to reveal the answer. 

A supplier offers a customer a trade discount of 10% for orders over £500, and a prompt payment discount of 2.5% if the invoice is paid within seven days. The customer places an order for £600 (net) and pays within seven days. The amount the customer pays is:

The correct answer is £631.80. 

£648.00 is the amount that will be shown on the invoice, not the amount paid by the customer. £702.00 is the order of £600 with the prompt payment discount applied and VAT added, but not the trade discount. 

This is correct. The net amount after the trade discount is £540.00 (£600.00 x 90%).

The prompt payment discount is £13.50 (£540.00 x 2.5%). So the net amount (with prompt payment discount) is £540.00 - £13.50 = £526.50. The VAT is £105.30 ((£540.00 - £13.50) x 20%). The customer pays £631.80 (£540.00 - £13.50 + £105.30). 

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