In the United Kingdom and some other countries, tax is assessed only on what the customer actually pays—that is, on the sales amount minus credit terms discounts. When taxes are discounted, the net order amount can vary, depending on whether the credit terms discount is applied to the tax amount.

In Tax Rate Maintenance, two settings govern the setup of discounted taxes: Discount Tax at Invoice and Discount Tax at Payment.

Initially, only the tax is discounted. If the customer is still eligible for the discount when payment is received, the sales amount is discounted to 98.00 and the payment amount to apply changes to 107.80.

If the customer is late, the discount tax amount reverts to the non-discounted tax amount of 10.00 and the payment amount to apply changes to 110.00.

In countries such as Germany where discounting is traditionally done at payment rather than on invoicing, holding all discounts amounts in the same GL account—regardless of their tax rate—makes it difficult to verify that the correct amount of VAT has been booked. To avoid this problem, you can set up AR and AP Discount accounts per tax rate in Tax Rate Maintenance. Discounts are then booked into these accounts based on the tax rate associated with customer and supplier invoices.

If you do not set up these accounts, discounts are posted to the AP or AR Discount accounts associated with the bank account or cash account being updated by the payment. These accounts are defined when the account is set up in Account Create (25.3.13.1).

When a customer takes advantage of a discount due upon invoice payment or you take advantage of a discount offered by a supplier, a VAT correction must be made to the appropriate VAT account. Also, the discounted amount, less the VAT component, must be posted to the discount account.

In this example, if the customer takes advantage of the early settlement discount of 2.35 offered on payment of this invoice, a correction to the relevant VAT account is needed. A deduction of 0.35—the VAT component of the discount—must be posted to the appropriate VAT account for the relevant tax code. The sum of 2.00 must be booked to the discount account.

If all discounted amounts are booked to the same discount account regardless of the associated tax code, it becomes difficult to determine that the correct amount of VAT has been booked. To properly calculate the VAT booked, the discount amount for the tax percentage needs to be deducted from the sales amount. This would be a time-consuming calculation if all discount amounts had to be booked to a single discount account. Posting discount amounts to different discount accounts based on their tax rate simplifies this calculation.

When payments are processed, the system checks the tax rate for each invoice, the appropriate discount is taken, and that discount is automatically posted to the correct AP or AR Discount account. If multiple tax rates apply, the discount is split among the discount accounts defined for the tax rates concerned. These GL accounts override the value of the discount account associated with the bank or cash GL account.

For cross-company payments, the invoicing entity is liable for taxes. Therefore, tax discounts for cross-company payments are accounted for in the invoicing entity rather than in the payment entity. The posting for the discount of the goods amount is posted to the payment entity and the discount of taxes is posted to the invoicing entity, regardless of the program you use to make a payment.