It is common practice for many businesses to offer a bulk discount deal – where the customer pays the full price for a quantity of goods, but is then entitled to a further quantity of goods free, eg three for the price of two. See Example 6.
JKL Ltd manufacturers wood tables, selling goods to retailers throughout the country. In order to encourage bulk purchases, they give customers the chance to purchase ten tables at a standard list price – but then supply another table free of charge. In other words, '11 for the price of 10'.
On sales invoices raised for this type of deal, the eleventh table is recorded as a free sale.
Solution – VAT officers may be tempted to go down the route of assessing output tax based on the market value of the eleventh table. However, the correct outcome is that output tax is only due on the total price paid by the customer, ie the ten tables at list price. It is the consideration from the customer that is the basis of the VAT charge in this situation.
Another common form of discount is a prompt payment discount. With a prompt payment discount a customer receives a discount if they pay within a certain time of the