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If you offer a discount to your customers for prompt payment, the VAT treatment has become quite tricky.

For many years UK legislation has allowed suppliers to account for VAT on the discounted price offered for prompt payment even when that discount was not taken up. An example would be a 5% discount of the full price if payment was made within 14 days of invoice date. If the supply was for £1,000 (20% standard VAT rate), VAT on the invoice could be charged at £190 (£1,000 less 5% discount x 20%) rather than £200 (£1,000 x 20%). Whether the customer took up the discount or not the VAT payable would stay at £190 in both cases.

The VAT treatment has now been brought into line with the Principal VAT Directive, which requires VAT to be accounted for on the consideration actually received. The change applies generally to businesses that offer a prompt payment discount (PPD) on invoices raised or received from the 1 April 2015. The change does not apply to imports.

Correct accounting

On issuing a VAT invoice a business will have to record the VAT on the full price on the invoice and in their accounts. If offering a PPD suppliers must show the rate of the discount offered on their invoice. If the PPD is taken up then the supplier will have to make an adjustment in their accounts to reflect the reduced consideration. In addition the supplier will have to decide which of two processes it will undertake to inform the customer that the PPD has been validly claimed and the reduced VAT payment accepted. This can be done either through formally issuing a credit note or an approved statement on the original invoice. An example of this would be:

‘A discount of X% of the full price applies if payment is made within Y days of the invoice date. No credit note will be issued. Following payment you must ensure you have only recovered the VAT actually paid.’

If you have any questions on the correct procedures regarding prompt payment discounts and VAT or information requirements in the light of this change, please do not hesitate to contact us.

More from our tax experts

You can find all of our latest tax articles and tax resources here.

If you are looking for advice in a particular area, please get in touch with your usual Hawsons contact.

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Stephen Charles is a tax partner at the firm, specialising in corporate and business taxation. For more details and advice, please contact Stephen on [email protected] or 0114 266 7141.

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