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Author: JW / / Latest News

Update on the VAT situation if you offer prompt payment (early settlement) discounts

Back in June 2014 we advised you that a change in the rules on VAT was to be implemented on 1 April 2015.

If prompt payment discounts are offered the VAT will now be due on the actual amount paid, where previously it was always on the amount after the discount regardless of whether the discount was taken. Eg something sells for £100 but a 2% prompt payment discount is offered, the VAT was previously based on £98 (VAT = £19.60) whether the customer took the £2 discount or not.

When the legislation was announced, it was thought that the invoice would need to be issued showing the full price but advising that a 2% discount could be taken if payment was made in a specified time, and that if the discount was taken, a credit note would need to be issued.

HMRC have now confirmed that it WILL NOT be necessary to issue a credit note (but you can do it that way if you want) provided the following are shown on the original invoice:

1. The terms of the “prompt payment discount” eg 2% discount if paid within 14 days.

2. A statement that the customer must only recover the input VAT actually paid if the prompt payment discount is taken, rather than the full amount shown on the invoice.

It may be sensible to show both sets of figures on the invoice, in the example above, £100 plus £20 VAT and £98 plus £19.60 VAT if paid within 14 days.

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