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From April 2015, HMRC changed the rules as to how VAT should be accounted for on invoices with a prompt payment discount. Prior to the change, VAT would always be calculated on the discounted value irrespective of whether the discount was actually taken. Now, suppliers offering prompt payment discount must record the VAT amount on the full invoice price. If the supplier is offering a prompt payment discount, the rate and terms of the discount offered will also be shown on the invoice.

The supplier will not know if the discount has been taken until they are paid in accordance with the terms offered on the invoice.

Options

a) Suppliers may issue a credit note to evidence the reduction in payment made and the reduced VAT on that payment value (our preferred option).

OR

b) If a supplier does not wish to issue a credit note, the original invoice must contain the following information:

  • The terms of the prompt payment discount (time and discount offered); and
  • A statement that the customer can only recover the actual VAT paid to the supplier.
  • Additionally, invoices may show the discounted price, discounted VAT and total amount due if discount is take

Detailed guidance of how to process the invoice in UFS is available.

 

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