A cash discount changes the taxable amount
When a customer takes a cash discount, the seller receives less money for the same supply. For VAT purposes this is a change in the taxable amount. Under § 10 (1) of the German VAT Act (UStG), VAT is based on the consideration, i.e. everything the recipient spends on the supply, less VAT. If less is paid, the consideration falls and so does the tax.
This means the VAT on the original invoice was correct at first. But it becomes too high afterwards as soon as the discount is taken. That is why it has to be corrected.
What § 17 UStG requires
§ 17 (1) UStG governs changes to the taxable amount. Three sentences matter for the cash discount:
- Sentence 1: the business that made the supply must correct the tax amount owed for it. That is the seller.
- Sentence 2: the input VAT deduction of the business that received the supply must also be corrected. That is the buyer.
- Sentence 7: both corrections are made for the tax period in which the change occurred.
So the correction runs on both sides and for the same period. It is made in the books and flows into the VAT return. Economically it is neutral for both sides: the seller pays less output VAT, and the buyer gets correspondingly less input VAT refunded.
When is the correction made?
What matters is the point at which the taxable amount changes, which for a cash discount is the time of payment. An example: the invoice is dated 25 March, payment with discount is made on 3 April. The full VAT goes into the March return. The correction by the VAT portion of the discount goes into the April return. The buyer does the same with its input VAT.
How to calculate the correction
The discount is usually calculated on the gross amount. The VAT it contains is:
Correction = gross discount × VAT rate / (100 + VAT rate)
| Invoice gross | VAT rate | 2% discount | of which VAT | of which net |
|---|---|---|---|---|
| €1,190.00 | 19% | €23.80 | €3.80 | €20.00 |
| €1,070.00 | 7% | €21.40 | €1.40 | €20.00 |
| €4,760.00 | 19% | €95.20 | €15.20 | €80.00 |
The cash discount calculator shows the correction directly. For splitting gross into net and VAT in general, use the VAT calculator.
Invoices with several VAT rates
If an invoice contains items at 19% and at 7%, the discount has to be split by rate. The simplest way is to calculate the discount separately for each rate. Example: €1,190 gross at 19% and €535 gross at 7%, 2% discount:
- 19% portion: €23.80 discount, of which €3.80 VAT
- 7% portion: €10.70 discount, of which €0.70 VAT
In total €34.50 discount is taken and the tax falls by €4.50. Correcting the whole discount at a flat 19% would be wrong.
The discount belongs on the invoice
§ 14 (4) sentence 1 no. 7 UStG requires an invoice to state, in addition to the consideration, “any reduction of the consideration agreed in advance” unless it is already reflected in the consideration. A cash discount is exactly such an advance agreement. The discount terms should therefore be on the invoice, e.g. “2% discount for payment within 10 days of the invoice date”.
If the detail is missing, the invoice is incomplete. Whether and what consequences this has for the input VAT deduction in an individual case should be clarified with your tax adviser. Writing the terms clearly on the invoice is the clean solution in any case.
Special case: small businesses
Small businesses under § 19 UStG do not charge VAT. If they grant a discount, there is nothing to correct. The discount only reduces revenue. Select 0% VAT in the calculator for this case.
Summary
- A cash discount reduces the consideration and therefore VAT (§ 10 (1) UStG).
- The seller corrects its output VAT, the buyer its input VAT (§ 17 (1) sentences 1 and 2 UStG).
- The correction belongs in the VAT period of the payment (§ 17 (1) sentence 7 UStG).
- With mixed VAT rates the discount is split.
- The discount terms belong on the invoice (§ 14 (4) sentence 1 no. 7 UStG).
The basics of the calculation are in the cash discount guide, the entries in the article Booking a cash discount.