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New rules for calculating VAT on prompt payment discounts PDF Print E-mail
Wednesday, 12 November 2014 09:03

At present, where a supplier offers a prompt payment discount, then the VAT due is calculated on the discounted invoiced price, even if the customer does not take up the discount.

From 1 April 2015, VAT will have to be calculated on the full invoice price, on the assumption that the customer will not take up the discount. If the customer does subsequently take up the discount, then the supplier is required to issue a credit note for the discount amount and related VAT.

Since most accounting software packages in the UK are designed to calculate the VAT due on the discounted price rather than the full undiscounted price of the invoice, this change will require updates to software to ensure that the business is charging the correct amount of VAT.

In our view, the requirement to issue credit notes if the discount is taken up will significantly increase the administrative burden of dealing with them. There is also the risk that customers who take up the prompt settlement discount may fail to reduce their input VAT (i.e. VAT on purchases) resulting in loss of VAT to HMRC.

How we can help
If you think you might be affected by the new rules and are not sure how to implement the new rules, please contact us.

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