If I give 10 off a VAT-inclusive price, why doesn't my income fall by the full 10?

What happens when you cut a tax-inclusive price

The 230 the customer sees has two parts: a net amount for you and tax you pay on. When you make it 220, you do not get to choose which part the discount comes from, because the tax is still a percentage of the new net. So the discount is shared between the two parts in the same proportion as the price itself.

That works in your favour: the customer sees a full 10 off, but what you give up from your income is less.

Work it out in one step

1. Open the VAT calculator and choose Extract tax from a gross amount.
2. Enter the discount itself, 10, with the rate that applies to you, here 15.
3. Result: 8.70 net and 1.30 tax. The first figure is what comes off your income.

The longer check: extract 230 and the net is 200 with 30 tax. Extract 220 and the net is 191.30 with 28.70 tax. The net falls by 8.70 and the tax by 1.30, which together make 10.

Showing it on the invoice

If your invoice lists prices before tax, the discount line belongs before tax too. Write the discount as 8.70, then tax is calculated on the net after the discount, and the total of 220 matches what you promised the customer.

The common slip is writing a discount of 10 against the pre-tax price. The net then falls by the full 10 and the total the customer pays falls by more than 10, so you give away more than you meant.

What about percentage discounts?

Ten percent off a tax-inclusive price is also ten percent off the net and off the tax, because the proportion holds. The effect only shows with fixed-amount discounts. For percentage discounts, or two discounts stacked, use the Discount calculator, then extract the tax from the final price to see your net.