Tax on discounts, deposits and advance payments

Tax is charged on the discounted amount, not the list price — and on a deposit it is usually due when the money arrives, not when the work is finished.

Two mistakes here cost real money, and they cost it in opposite directions. Discounts make people over-collect tax and hand the difference over out of their own margin. Deposits make people under-declare it and owe a correction later.

A discount reduces the taxable value

If the discount appears on the invoice, the tax base is what the customer actually owes after it. Invoice 4,100 of work with a 5% discount shown on the document and the taxable value is 3,895 — so at 20% the tax is 779, not 820. That difference is not the revenue's to keep and not yours to give away.

The reasoning is the same in every system I have looked at, because tax attaches to the consideration — what is actually paid — rather than to a list price nobody paid.

Where it stops being obvious

• A discount offered but not taken. An early-settlement discount the customer ignores means the full amount was the consideration, so the full amount is taxed. Some systems want the terms stated on the invoice; others expect a credit note if it is taken up later.
• A retrospective rebate. A volume rebate agreed after invoicing is normally handled with a credit note, not by quietly reissuing the original invoice.
• "Free" items. Two-for-one and similar offers are usually treated as a discount across the whole supply rather than one taxed item plus one gift.

Deposits are usually taxable on receipt

The instinct is that tax falls due when the job is finished. In most VAT and GST systems the tax point moves to whichever comes first — the supply, the invoice, or the payment. Take a deposit in March for work delivered in June and the tax on that deposit generally belongs to the March period.

Which is why a deposit should be invoiced, not just banked. An unrecorded deposit is the most common reason a small business's tax return disagrees with its bank statement.

The refundable-deposit exception

A genuine security deposit — refundable, held against damage, not consideration for anything — is usually outside the scope until it is applied to a supply. The test is whether the money buys something. If the deposit is simply the first slice of the price, it is consideration and it is taxable.

Four rules that keep it straight

1. Show the discount as its own line, and calculate tax on the total after it.
2. Raise a document for every deposit on the day it arrives.
3. Use a credit note for anything agreed after the invoice went out.
4. Show the deposit already paid on the final invoice, so the balance owing is unambiguous.

Tax points and credit-note rules vary by country, so check the detail for yours in the country guides. How much deposit to ask for is a separate, commercial question.

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