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
Less 10% cash discount (30.00)
Goods after cash discount 270.00
VAT @ 20% of £270.00 54.00
Gross Invoice total £324.00