Prompt payment discounts – VAT changes

Changes coming into effect on 1 April 2015 will mean that VAT charged on sales invoices subject to settlement discounts will change. It’s common for companies to offer their customers a discount if they pay their invoices earlier than the normal trade terms. Currently VAT is charged on the reduced amount even if ultimately the customer ends up paying on the agreed terms and not earlier.

E.g. You sell goods to a customer for £10,000 + VAT @20% of £2,000 = £12,000 in total and give them a 5% discount for paying in 14 days rather than the usual 30 days. The VAT will be 20% of the discounted invoice value of £9,500 = £1,900 not £2,000 even if ultimately they still only pay in 30 days. So they would actually pay £11,400 in total not £12,000.

The regulation changes will mean that VAT is charged on the actual amount the customer pays. In the above example if the customer is invoiced for £12,000 and if they did pay in 14 days then the company raising the invoice will raise a credit note for £500 + VAT =£600, but if they end up paying in the usual 30 days then the full invoice value is payable.

Companies who do currently use payment discount schemes will need to ensure their sales invoicing procedures are amended accordingly, or they will be underpaying VAT and will be subject to interest and penalties when they get a VAT inspection.


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