If you are producing a quote/order which also has a discount you may question the VAT amount that is being calculated. It is important to understand how EQ calculates VAT within the guidance.
Overview: As a retailer you can apply a discount to vary the selling price as you require. How you apply a discount will dictate how the VAT is calculated.
- Add a percentage discount to product(s) and the VAT is calculated per product.
- Add an additional figure discount and the VAT may not match what the customer expects.
The general rules on discounts/promotions are set out in sections 7.3.2 and 18.2 of Public Notice 700 (this notice can be downloaded from the HMRC web-site). There is also a supplementary guide on Business Promotion Schemes (700/7) issued in March 2002. In the case of both of these documents there is NO specific guidance on the allocation of discount between VATable and non VATable supplies.
The general rule is that it is up to the retailer to decide the price (and as part of this process the allocation of any discount) at which they sell VATable and non VATable goods and then apply the appropriate VAT rate to the net price. HMRC do not dictate the price at which goods are sold by a retailer. The only exception to this rule is where the retailer is unwilling or unable to track the split of sales between their supplies of VATable or non VATable goods/services in which case they (the retailer) must register for one of three Retail VAT Schemes (e.g. Direct Calculation Schemes 1 and 2 would apply to many retailers).
EQ defaults the allocation of discount to VATable items first to minimise the VAT charge.
If the resulting VAT calculation is not desired, you can achieve a pro-rata allocation of VAT by using the percentage discount feature. A per product percentage discount will give a more predictable result of VAT calculation. This function will allocate the discount as a simple percentage across VATable and non-VATable products.