Skip to main content

Calculating VAT on discounts

Calculating VAT on discounts can be done in one of the two ways – by issuing an invoice or credit note.

Downloadable examples: 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.’ 

 

Download: Please login or register to get your download.

Login or Register

Share this content

Register with Informi today:

  • Join over 20,000 like-minded business professionals
  • Create your own personalised account with curated reading lists and checklists
  • Access exclusive resources including business plans, templates, and tax calculators
  • Receive the latest business advice and insights from Informi
  • Join in the discussion through the comments section

or

I’ve been working through the how to start a business in 20 days ebook and so many of the things I’d done are now nicely tied together and some gaps now filled. I love the simplicity. Thank you.

Sarah Gosling – Gosling Charity Consulting

I love receiving my Informi emails. They’re always well written and engaging.

Jennifer Hobson – JEH Bookkeeping