VAT on discounts

Question

I have had a long discussion with Chris at CT regarding VAT calculations on discounted orders.

In my example I have a product = £15 @ 20% VAT

£12.5 * 1.2 = £15 (£2.50 VAT included).

Now I want to give a £4 discount. As VAT is calculated on the discounted sale price my thinking is that the taxable total would be £15 - £4 = £11. VAT would therefore be £1.83.

Chris believes this is wrong and it can only be one of these two scenarios:

1. (12.5 - 4) * 1.2 That makes a total of 10.2. VAT of 1.70

2. (12.5 * 1.2) - 4 That makes a total of 11. VAT of 2.5

I think neither of those scenarios give the correct VAT amount although the equations do balance out.

In CT it is not clear whether the value you put in as the discount amount includes or excludes VAT and I think the percentage amount only appears to apply to the tax inc price but not the taxed amount itself? Having done a bit of research I think the calculations should be more along the lines of:

1) If the discount is a percentage, the percentage is applied to each component. So a 50% discount would be: £7.50 of which £1.25 is VAT = £12.50 (base) + £2.50 (vat) - £6.25 (base) - £1.25 (vat).

2) If the discount is a flat amount, it needs to have the VAT component reverse-calculated A £4 discount would be: £11 of which £1.83 is VAT = £12.50 (base) + £2.50 (vat) - (£3.33 (base) + £0.67 (vat)).

Where this gets more complicated are sales which include vattable and non vattable products (such as books) and whether the discount applies to an individual line item or the cart total as a whole.

Has anyone else had issues with VAT on discounts in CT and worked out a solution.. or is my logic completely wrong!!

Answer 1

I think this may depend on whether you are selling to businesses or individuals (i.e. whether any VAT can be reclaimed).

If you are selling to individuals then you should be showing prices inclusive of VAT, in which case it would make sense that the discount is applied to the gross price.

However, if you are selling to businesses then it might be preferable to apply the discount to the net price and then apply the VAT to the new value.

Ultimately, I think it's down to preference and who you are selling to but both methods should be possible within CartThrob.

I did a site a while back for a client that sold both VATtable and non-VATtable goods. It was quite complicated and needed a custom plugin to deal with it. Unfortunately it this didn't work correctly. But I now see that in the latest version of CT there seems to be a way to apply tax by product rather than on the final cart value. I have yet to test this out though.

Answer 2

Gov.uk can get convoluted with their explanations in places, but this 8 point reference is pretty succinct; point 8 of particular note:

Discounts: Charged on the discounted price (not the full price)

VAT on discounts and free gifts

So in the first instance, and with regard to the example you first presented:

ITEM PRICE £12.50 (+£2.50 VAT) = £15.00 DISCOUNT £4.00 GRAND TOTAL £8.50 (+£1.70 VAT) = £10.20

So Chris is correct with respect to scenario 1.

In the case where non-vat items are included, you simply make subtotal A of your non-vat items, and sub-total B of your vat chargeable items; VAT is then only calculated on the sub-total B.

((A + B) - Discount) + (B * 0.2)

The discount is applied to your subtotal, before the VAT calculationWhere 0.2 is the 20% prevailing VAT rate.

Mixed VAT/non-VAT Items in basket

Seems somewhat open to interpretation, with the guidance on HMRC/GOV.uk not particularly clear - but again, based on online advice/consensus, it seems that it's considered fair game to apply the discount to whichever category of item you desire (and will likely differ depending on whether the bulk of your customers are VAT registered or not).

Discounts on mixed VAT sales (see comments)



N.B. - Delivery charges

I know your original post didn't specifically mention this - however for completeness of answer, it is considered good practice (by some) to apportion your delivery charge as vat/non-vat, dependent on the balance of vat/non-vat goods in your basket. An article here discusses this in some depth, taking basket contents down to percentages(!):

VAT on delivery of mixed rate goods

It seems that the official guidance from HMRC is subject somewhat to interpretation - and certainly my take is generally to err on the side of caution and VAT delivery whenever any VAT-chargeable goods are present.

So in short (or not!) your logic is not illogical - but this hopefully helps to clarify Chris CT's position on the VAT, and perhaps shed light on some of the other considerations too.