Every now and then the issue arises as to how one is to treat early settlement discounts in respect of Value-added Tax (VAT).
For example, a supplier who is a VAT vendor supplies goodsto a customer on credit. The supplier and the customer agree upfront, or have a general agreement in place, to the effect that the customer will receive discount if the account is settled on or before a certain date.
Since a VAT vendor who makes a taxable supply has to issue a tax invoice to the recipient within 21 days of making the supply, in terms of section 20 of the VAT Act, No 89 1991 (VAT Act), and since the VAT vendor has to account for output VAT in respect of that supply with reference to its applicable tax period, certain practical problems may arise. For instance, there may be uncertainty as to what the value of the supply is, what amount should be reflected on the tax invoice and whether any credit or debit notes need to be issued.
There are various ways in which one can construe such a set of facts.
Firstly, one could view the transaction as a supply, the consideration for which is determined upfront as being a higher amount, but if payment is made before a certain date, the consideration will be reduced to a lower amount. In such a scenario it seems clear that a tax invoice has to be issued to the recipient for the higher amount, and if the recipient pays early and qualifies for the lower amount, a credit note needs to be issued to the recipient in terms of s21(1)(c) of the VAT Act indicating the decrease. This is a typical early settlement discount scenario.
Secondly, one could view the transaction as a supply, the consideration for which is determined upfront as being a lower amount, but if payment is made after a certain date, the consideration will be increased to a higher amount. Here it seems that a tax invoice has to be issued to the recipient for the lower amount, and if the recipient pays late, a debit note needs to be issued to the recipient in terms of s21(1)(c) of the VAT Act indicating the increase.
In GUD Holdings (Pty) Ltd v Commissioner for the South African Revenue Service 69 SATC 115, the court characterised what would generally be termed a 'settlement discount' not as a discount but as a late payment penalty, in line with the second scenario above. From this judgment it is clear that it would depend on the facts, and specifically on the wording of any agreements, whether one is dealing with a discount or a penalty.
Thirdly, one could view the transaction as a supply, the consideration for which is either one of two amounts – a lower amount if payment is made on or before a certain date, or a higher amount if payment is made after that date. At the time of supply the consideration is completely uncertain and not determinable. The consideration will only be determinable on the date of payment or the cut-off date that qualifies the recipient for paying the lower amount, whichever arrives first.
In this scenario it may be completely unclear as to whether one should issue an invoice for the higher or lower amount. In practice, vendors may issue invoices stating both the higher and lower amounts and the conditions under which either will apply. However, this is not necessarily helpful as the vendor would still have to account for output VAT in respect of the applicable tax period, and if the consideration does not become certain by that time, the vendor may not know which amount to account for.
Recently the South African Revenue Service released Binding General Ruling 6, in which it rather briefly deals with the issue of early settlement discounts in the Fast Moving Consumable Goods industry. The ruling simply states that a vendor must issue a credit note for a discount if the discount:
- alters the original purchase price of a supply of goods or services in terms of an agreement with the recipient; and
- results in the tax charged on the tax invoice in relation to that supply being incorrect (that is, the amount of tax charged shown on the tax invoice exceeds the actual tax charged).
The ruling also indicates that where a "discount" is extended that does not actually alter the consideration for the supply, but in fact constitutes consideration by the vendor for a service or other supply by the recipient to the vendor, the recipient must account for VAT on that supply.
It seems that for the most part the proper treatment of an early settlement discount will depend on the facts. However, there will oftenbe scenarios in which it is very difficult to determine the amount of the consideration that should be accounted for.