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UK VAT on prompt payment discounts

  • VAT
  • 26 January 2015 | Richard Asquith

UK VAT on prompt payment discounts

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.

 


VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He is part of the European leadership team which this year won International Tax Review's Tax Technology Firm of the Year. Richard qualified as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.