This is a freeview 'At a glance' guide to VAT on prompt payment discounts. 

The amount of VAT payable can be affected by discounts, including prompt payment discounts, unconditional discounts and contingent discounts.

Prompt payment discounts

Post 1 April 2015

  • 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.
  • See Revenue Brief 49/2014.

Pre 1 April 2015

  • Businesses could issue invoices providing the details of the amount of any prompt payment discount, the terms and VAT due calculated on the discounted price.
  • If the discount is not taken up, HMRC did not require businesses to alter the amount of VAT invoiced and accounted for.

Unconditional discounts

  • 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.

Contingent discounts

  • 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.
  • 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 total of invoice 2 in the normal way, which takes account of the credit.
  • The result is that you have claimed VAT based on what you have paid.

Contingent discounts override

  • HMRC allow 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.

Debit notes

  • HMRC also accept 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. In this guide we cover some common schemes.

What constitutes a valid VAT invoice?
What needs to be included on a VAT invoice? Can you claim back VAT without an invoice? What evidence do you need to claim input VAT? A valid VAT invoice is required to reclaim input VAT. HMRC have discretion to allow defective invoices. 

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?

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