UK VAT on prompt payment discounts
- 26 January 2015 | Richard Asquith
The UK VAT tax authorities, HMRC, have provided updated guidance on the treatment of VAT on discounts vendors provide their customers for early settlements of invoices. The latest guidance will come into effect from 1 April 2015.
Where a vendor offers a discount for prompt or early settlement, HMRC has provided for two different options on the UK VAT treatment.
- Issue a credit note, with the supplier recording the VAT reduction in their next VAT return.
- Issue a VAT invoice disclosing additional details reflecting the prompt payment, and making clear that the customer should use the reduced VAT for their input VAT suffered figure. If the offer is taken up by the customer, the vendor should retain evidence of this – for example, bank statements. If there is any variation from the payment terms, the vendor must instead use the bad debt relief mechanism to claim any differences.
Customer VAT records
Customers using the prompt payment discount may apply the VAT actually paid in the regular fashion. Credit notes are entered as normal. If they do not receive a credit note, and use the payment offer later, they must retain evidence of the terms to prove the lower VAT paid and claimed back.