Cash discount

What does cash discount mean? 

With a cash discount, a supplier rewards customers who pay the invoice quickly, specifically within the term stated with the discount. This should not be confused with paying in cash! If the customer pays within five days, for example, they get a 2% discount on the invoice amount excluding VAT. A win-win situation: a nice bonus for the customer, and you receive payment sooner.

Taxable amount

With a cash discount, do apply the correct VAT calculation. A cash discount changes the so-called ‘taxable amount’. In concrete terms: before the VAT is calculated, you reduce the total amount excluding VAT on the invoice by the cash discount, because in principle VAT is always calculated after the discount. The amount on which you calculate VAT is therefore always the amount after deduction of the cash discount. If you apply a cash discount, all your customers in fact pay slightly less VAT, because the taxable amount always includes the proposed cash discount. That applies both to you and to the customers, even if they pay outside the cash discount period.

Examples of VAT calculation with a cash discount

The difference in calculation becomes clear in the examples below:

Invoice with commercial discount: 

 
Invoice with cash discount:

 
So whether or not your customer pays on time ultimately makes no difference to the VAT administration.

But always pay close attention to the type of discount involved and how you will apply the VAT calculation! Incorrect VAT collections or remittances will in principle result in a fine ... Have you made a mistake on your invoice after all? Then the safest solution is to work with a credit note and a new, correct invoice. That is also the clearest for the accountant and for looking things up afterwards, such as during a VAT audit.

A discount for cash payment is also called a ‘financial discount'. It is not the same as a trade discount or commercial discount, for which a different calculation is used.