Calculating VAT on discounts

Click on the download button below to view and download reusable templates for an invoice and credit note. 

Calculating VAT on discounts can be done in one of the two ways. Extracts in the attached invoices contain discounts shown as follows:

Option 1: Issue an invoice

• An invoice is prepared for the full amount. In this example the amount is £300. 
• The rate of VAT is clearly shown (at 20%)
• The trade discount is calculated at 15% and deducted from the usual price (£300 – £45.00 = £255)
• The VAT is calculated on the net: £255 x 20% = £51
• The amount payable if the prompt payment discount is not taken is shown (£306), along with the terms of the prompt payment discount – ‘A 3% discount applies if payment is made within seven days of the invoice date.’ 

Option 1 – Issue a credit note

The customer pays the reduced amount, therefore a credit note is issued. 

• The rate of VAT is clearly shown (at 20%)
• This is 3% of the net figure on the invoice: £255 x 3% = £7.65
• The VAT is calculated on the net: £7.65 x 20% = £1.53
• This is the amount by which the original invoice has been reduced. The customer paid £296.82 (£306.00 – £9.18).

Option 2: Include further information on the original invoice

The invoice is prepared for the full amount of £300 with additional information: 

• The rate of VAT is clearly shown (at 20%)
• The trade discount is calculated at 15% and deducted from the usual price (£300 – £45 =£255)
• The VAT is calculated on the net. £255 x 20% = £51
• The amount payable if the prompt payment discount is not taken is shown (£306), along with the terms of the prompt payment discount – ‘A 3% discount applies if payment is made within seven days of the invoice date. No credit note will be issued. On payment you may only recover the VAT actually paid.’ 

For more assistance with calculating VAT, use our online UK VAT Calculator.