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Cash Discounts - What are Cash Discounts?

Definition: Cash discounts are offered by suppliers as an incentive to pay invoices promptly.

As it is better to receive e.g. 95% of an invoice with a couple of days than wait 30 or more days to receive the full amount, some suppliers offer a cash discount for early payment.

If, as a supplier, you offer a cash discount on condition the invoice is paid early or within a specific time frame the VAT can be calculated on the basis that the discount will be taken so the VAT will be a percentage of the net amount after discount.

How it works:

An example of how a cash discount is applied:

Net price of goods 300.00

VAT Calculation:

Goods 300.00
Less 10% cash discount (30.00)
Goods after cash discount 270.00

VAT @ 20% of £270.00 54.00
Gross Invoice total £324.00