Basic Accounting - Case Study Settlement Discount Discrepancies?

[LittleSquidge]

I need help with understand a case study on my accounting course.


Ref: Basic Accounting 1, Tutorial (David Cox, Michael Fardon)

"Today's date: 25th November

Payment amount received: £458.25
Dated 8th of November. Terms indicate that 2.5% settlement discount is available to payment within 7 days. Goods total is £400 and the amount deducted is £10. VAT is £78.

Solution: The 7 day period for deduction of settlement discount has expired and therefore no discount should be deducted. The payment should have been £400 + VAT of £78 = £478.

(The part that is confusing me:)
Please note that he VAT is calculated on the £390 and not the £400, whether or not the discount is taken."


Why is this? How does their mistake mean that they have to pay less VAT on the total amount payable?

Forgive me, I'm new to this!

Thank you.

[thenry]

Basic accounting principles - don't think about paying the bar steward until he threatens to send you to court and then request a copy invoice and say your accounts dept. is dealing with it !

[Buenchico]

From the HMRC website:
http://www.hmrc.gov.u...asmanual/vcas5100.htm

Chris

[LittleSquidge]

Thank you for the link Chris.
I'm still confused though, as they were invoiced £400. So the VAT should have surely been worked out from that amount?

[Buenchico]

As long as a prompt payment discount is available (even if it wasn't actually mentioned on the invoice) then VAT is only payable on the discounted sum.

[LittleSquidge]

The discount is only available if the payment is made within 7 days.

They were invoiced the 8th and not paid until the 25th.
That's 17 days.

So, are you saying, that although they weren't in time for the discount, they still only pay VAT on 97.5% of goods just in case they were in time?

[Buenchico]

From my HMRC link (with capitals added by me):
"If a prompt payment discount is offered, VAT is chargeable on the discounted tax-exclusive invoiced price, EVEN IF THE CUSTOMER DOES NOT TAKE UP THE OFFER".

i.e. it makes no difference whatsoever whether the customer makes immediate payment by electronic transfer within seconds of receiving the invoice or whether he's still being chased for his cheque a year after the invoice was sent out. VAT is ONLY payable on the DISCOUNTED figure.

Chris

[Skyline D]

The price charged for the goods is £390. End of story. That is therefore the value used to calculate the VAT.

The other £10 is a credit charge, discounted if paid within terms. Charged if not. Credit charges are exempt from VAT and therefore VAT does not apply to the £10.

[LittleSquidge]

This was covered in a lecture today and I know understand it.
Thank you.

[pmllp]

You can consult http://www.pm-llp.com/. They are really good professionals and will help you out.