The amount of VAT payable can be affected by discounts, including prompt payment discounts, unconditional discounts and contingent discounts.
This is a freeview 'At a glance' guide to discounts and VAT.
Prompt payment discounts
- Businesses must account for VAT on the consideration they actually receive.
- Suppliers must invoice the full amount before discount and customers account for the amount of VAT that they pay.
- When a discount has been taken up, you should issue a credit note to the customer accounting for the discount and reduction in VAT.
- You can choose not to issue a credit note, as long as your original invoice included the terms of the discount, the payment deadline for the discount and a statement informing the customer they can only recover the VAT that is paid to you.
- HMRC's suggested wording is: "A discount of X% of the full price applies if payment is made within Y days. No credit note will be issued. Following payment you must ensure you have only recovered the VAT actually paid."
- See Revenue Brief 49/2014.
- In some cases, you may offer clients an unconditional discount, or you may have received an unconditional discount from a supplier.
- This may be as a result of previous transactions or for some other reason.
- These discounts do not require the customer to do anything, they are simply a reduction in price.
- The supplier’s VAT invoice will show the lower, discounted amount and the corresponding VAT, based on that discounted amount.
- The customer will pay the discounted amount and recover the VAT shown, based on that discounted amount.
- These are offered on condition of something happening, such as a minimum amount of purchases for example.
- In such a case, you would claim VAT on the first invoice in full and your supplier will issue you with a credit note later, on satisfaction of the condition, which will result in a VAT adjustment.
- For example
- You buy 1,000 widgets at £10 per unit plus VAT which are included on invoice number 1.
- A contingent 10% discount applies if you buy another 1,000 within the next 30 days.
- You buy another 1,000 widgets at £10 per unit plus VAT three weeks later which are included on invoice number 2.
- Your supplier issues you with a credit note for £1,000 plus VAT representing the 10% discount on the original supply.
- For example
- In some cases, the discount may be deducted from a future sales invoice.
- Example continued
- Instead of issuing a separate credit note, invoice 2 consists of two lines.
- One showing 1,000 units sold at £10 plus VAT.
- The second line shows a negative amount of 1,000 units at £1 plus VAT.
- The second line states the credit is in respect of a contingent discount applied to invoice number 1.
- In this case, you will claim the VAT based on the total of invoice 2 in the normal way, which takes account of the credit.
- Example continued
- The result is that you have claimed VAT based on what you have paid.
Contingent discounts override
- HMRC allows the supplier and purchaser to agree that the credit note need not be issued and the VAT need not be adjusted.
- If the customer can recover the VAT in full, then this agreement results in no loss of VAT to HMRC as the supplier has ‘overpaid’ VAT and the customer ‘overclaimed’ VAT by the same amount.
- If the customer cannot recover the VAT in full, then you will not be able to account for contingent discounts in this way.
- HMRC also accepts that a debit note can be provided by the customer to the supplier instead of a credit note from the supplier to the customer, if both parties agree.
- The debit note should contain the same information as would be included on a credit note.
Useful guides on this topic
Discounts, Reward Schemes & Vouchers: VAT
Loyalty and reward schemes come in various shapes and sizes and the VAT implications may vary depending on the type of scheme offered. This guide covers some common schemes.
Input VAT: What constitutes a valid claim (& VAT invoice)?
What is Input VAT? Who can claim it? What is needed for a valid claim? What needs to be included on a VAT invoice and can you make a claim without one?
Correcting VAT errors
What are the VAT error correction time limits? Can you correct errors through the VAT return? Do you have to notify HMRC?