Quiz: Do you understand VAT on discounts?

Correct: 

The correct answer is £631.80. 

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).

£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.

Incorrect: 

The correct answer is £631.80. 

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).

£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.