With prompt payment discounts, do you use the net or gross amount to calculate the discount?

With prompt payment discounts, do you use the net or gross amount to calculate the discount?

• A. Net amount
• B. Gross amount
• C. VAT amount
• D. Total including VAT

Answer: (A)

Prompt payment discounts are based on the price before VAT. You apply the discount to the net amount (excluding VAT), and then VAT is charged on that reduced net amount. This keeps VAT calculations consistent with the reduced price. For example, if the net price is 1000 and VAT is 20% (200), the total is 1200. A 5% prompt payment discount reduces the net price to 950. VAT on 950 is 190, so the total payable becomes 1140. If you tried applying the discount to the gross amount (including VAT), you’d end up with a different VAT base and total, which isn’t how prompt payment discounts are treated. Therefore, use the net amount to calculate the discount.

Prompt payment discounts are based on the price before VAT. You apply the discount to the net amount (excluding VAT), and then VAT is charged on that reduced net amount. This keeps VAT calculations consistent with the reduced price.

For example, if the net price is 1000 and VAT is 20% (200), the total is 1200. A 5% prompt payment discount reduces the net price to 950. VAT on 950 is 190, so the total payable becomes 1140. If you tried applying the discount to the gross amount (including VAT), you’d end up with a different VAT base and total, which isn’t how prompt payment discounts are treated. Therefore, use the net amount to calculate the discount.