VAT in the UK on invoices carrying payment discoun

Ok, another VAT question in the UK: A vendor invoice states that you can deduct 2% payment discount if the invoice is paid within 15 days, otherwise 30 days net. Apparently it is the law in the UK to deduct the 2% of the net amount on the invoice and add 17,5% VAT to get the gross amount. If the customer now pays within the 15 days, everything works fine (pay net amount minus 2% and add 17,5% VAT). BUT: If the customers wants to pay within 30 days, he obviously has to pay the full net amount. BUT in the UK he only needs to pay the VAT that was on the invoice (and includes the payment discount!). Weird, I know. How can I do this in Navision or is the law as I would expect it to be (which is calculating the VAT of the actual net amount paid)??? Ideas?

Hi Markus In the UK everything is ok In the VAT Guide from HM Customs and Excise (page 31)


Discounts for prompt payment. If you offer a discount on condition that the customer pays within a specified time ,the tax value is based on the discounted amount even if the customer does not take up the offer.

So even if you do not take the discount you only pay the VAT on the invoice. Basically I think once offered they have no real way of policing this, so they say you can process the output VAT to a lesser value.

Hi Markus In the G/L setup tick adjust for payment discount and then in the VAT posting setup you would also need to tick the adjust for Payment Discount. That is how we would cover it in Australia for payment discounts on GST (our VAT equivalent). This way the GST amount is adjusted for the discount given. Cheers Peter

Hi Steven and Peter, thanks for your replies. The setup was already done as you described. But Navision does not do it as wanted. Consider the following scenario: Invoice net amount: 60 Payment Discount 10%= 6 if paid within 10 days. VAT 17.5% on 54= 9.45 Gross amount if paid within 10 days: 63.45 If not paid within 10 days, the following happens: Invoice net amount: 60 VAT 17.5% on still 54= 9.45 Gross amount: 69.45 (and not as Navision calculates it: 60*1.175=70.50). Ideas other than using journals?

Hi Markus It is a set-up issue. Navision can work as follows: Customer given 10% early payment discount in paid within 30 days 01/01/03 Invoice raised for £100 VAT at discounted rate =£15.75 27/03/03 payment received for £115.75 applied to the invoice, all is cleared off remaining balance = 0 If I have to guess it will be the following set-up: General Ledger Set-up You have “Adust for Payment discount” flagged as yes If you do this the VAT is recalculated based upon the timing of the payment, i.e. if the payment falls outside the payment discount period the invoice value is recalculated. I think you need Payment Discount Ecxcluding VAT to be set to yes. You cannot have both these fields set to yes at the same time. I also think the VAT tolerance percentage must not be set to zero to get this to work (I cannot remember all the settings [:D]). Let me know how you get on.

Hi Steven, thanks for your posting - it seems to be working (still testing). If anybody else is interested, here the necessary settings: General Ledger Set-up: “Adust for Payment discount” flagged as no “Payment Discount Ecxcluding VAT” flagged to yes “VAT tolerance percentage” should be as high as the highest payment discount you get (about 5% should do [;)]) On an invoice, make sure the field “VAT BAse Discount Percentage” must carry the same value as the field “Payment Discount %”. That is it.

Reading this thread made me think of a VAT avoidance scam you could do. Offer the customer a 99.99% discount if they pay within one second so the VAT is calculated on 0.01% of the price. You make sure the customer can’t pay instantly so they have to pay the full price but the VAT is negligible making it effectively VAT free. This is just such an easy loophole it can’t be legal. Can it ??? Cheers, John P.S. I know you can’t set this up is standard Navision but that isn’t the point.

Close but no cigar John! Unless I am very wrong, the amount of VAT on an invoice is irrelevant. So if you bill £100 and offer 99% settlement discount the VAT is charged on £1 which is 17.5 (18) pence. So you bill out £100.18. The customer pays £100.18 and you give the VAT man 18 pence. You gain nothing. I’ve seen cases where the VAT man looses out because the customer doesn’t administer the discounted invoice correctly, but that’s another story…

You gain nothing??? well… if a customer can buy the same product from two different vendors and one of them is charging him 100 + VAT = 115 and the other is charging him 100+.18 = 100.18 who you think he’ll choose as vendor??? Regards,