TXF6 UK
Syllabus F. Value Added Tax F2. Computation of VAT liabilities

F2e. Principles regarding the valuation of supplies 5 / 11

Syllabus F2e)

Explain and apply the principles regarding the valuation of supplies.

Value of supply

The value of a supply is the VAT-exclusive price on which VAT is charged. 

With a standard rate of 20%:

  • Value + VAT = Selling price 
    £100 + £20.00 = £120.00

Discounts offered

VAT is chargeable on the actual amount received where a discount is offered for prompt payment.

  1. If the discount is not taken the VAT is charged on the full sale price

  2. if the discount is taken, then the VAT is based on the discounted price.

However, it is not as straightforward as that because we often don’t know when a customer will pay.

Therefore, the supplier can charge the full amount of the VAT and then issue a credit note for the discount if it is taken or the supplier can issue an invoice stating the terms of the discount and that the customer can only reclaim the VAT on the amount actually paid.

Illustration:

Tony is a sole trader and makes standard rated sales. 

He offers a discount of 5% to customers who pay within 14 days. 

He makes a sale of £100 (VAT exclusive). 

1) What is the output VAT charged if the customer pays within 14 days?
2) What is the output VAT charged if the customer doesn't pay within 14 days?

1) Solution ( if the customer pays within 14 days):

Sale £100
Discount (5%)  (£5)
Net Sale £95
Output VAT charged (20% * £95) = £19
Selling price  (95 + 19) = £114

2) Solution ( if the customer doesn't pay within 14 days):

Sale £100
Discount (0%)  (£0)
Net Sale £100
Output VAT charged (20% * £100) = £20
Selling price  (100 + 20) = £120