Trade discount

What does trade discount mean?

With a trade discount, the trader gives the customer a price reduction as a commercial gesture. The trader's motivation is to boost trade, in other words to sell more, hence the name trade or commercial discount. Anyone who receives such a discount will usually appreciate the gesture and give positive feedback about the trader: publicity!

There are, however, many other reasons, for example as an extra sales argument when launching a new item, or because the product originally requested is no longer available and the trader supplies a replacement product.

Among many other reasons, the commercial discount may also be intended to compensate a customer for an inconvenience (and to win him/her back over), such as late delivery or some shortcoming, for example a misunderstanding or even (limited) damage. The motivation here is always to do (further and more) business, in other words to boost sales, hence the term 'commercial' discount.

When do you use a trade or commercial discount?

There are many reasons why a trader gives a commercial discount:

• The launch of a new product or service, so that the reduced price tempts customers to try it
• The fact that a customer buys a large quantity
• As compensation for a hiccup in the relationship or a shortcoming in the delivery, such as a complaint from a dissatisfied customer, to compensate for an excessively long delivery time or for the fact that an ordered product is no longer available so that a substitute is delivered
• Seasonal or event-related promotions (at a village fair) or a clearance of stock items

A commercial discount can be given either on the invoice itself or afterwards. The latter, for example, by means of a credit note.

Commercial discount is not a financial discount

They do indeed differ in the intended result. With the financial discount or payment discount – sometimes also called cash discount - the entrepreneur wants to encourage payment by a customer. If the customer pays within a fixed period, the invoice amount excluding VAT may be reduced by a certain percentage, typically 2%, sometimes up to 3%. That period can range from ‘immediately’, i.e. cash, to a few days or even a month. The period depends on the sector and on the financial situation and policy of the entrepreneur. After all, fast payment improves the entrepreneur's cash position (cash flow), which is like the blood in a living organism: solid cash keeps the business running. And don't forget that buying a few percent cheaper – including through the financial discount – increases the trading margin and therefore the eventual profit.

The financial discount and the commercial discount differ as far as VAT is concerned.

• With the commercial discount, the taxable base is the amount minus the discount.
• With the financial discount, VAT is always calculated on the invoice amount MINUS the commercial discount. So even if the customer pays outside the period in which the discount applies, he or she still does not pay VAT on the amount corresponding to the payment discount.

VAT calculation

The difference in the calculation becomes clear in the examples below:

Invoice with commercial discount: 

 
Invoice with cash discount:

  
With the commercial discount, the taxable base is the amount minus the discount.