VAT on Discounted Sales

Posted on Posted in VAT

G Ltd. offers a discount of 10% to its customers who make the payments within 30 days of the invoice.

Question: G Ltd. has made a sale of £4500 plus VAT to a customer G Ltd. Should G Ltd. pay output VAT on full £4500 or on the price after discount offer.

Answer: After the discounted price. So, the output VAT, in this case, will be £810. (£4500 x 0.9 x 20%).

Well, this was the case before 31.03.2015 whereby numerous companies used to calculate the output VAT on their invoice on the discounted price regardless of discount being availed by their customer.

From 1st April 2015, the VAT rules have been changed for the tax payers offering such discounts their sales.

As per the new rules, output VAT can be reduced only if the customer avails the discount by prompt payment.

How this will work procedurally?

There are two options given by HMRC to account for VAT on discount given to customers.

Option 1

Sales invoice needs to be issued for the full sales value without any discount, and a credit note will need to be issued where a discount is taken. Obviously, this will add an administrative burden.


As a result, HMRC has given another option.


Option 2
State on the invoice that no credit note will be issued if the discount is taken. If the customer takes the discount, the supplier will only be able to reduce the amount of VAT paid to HMRC by being able to demonstrate, by reference to evidence of payment, that a reduced payment was received. The HMRC business brief attached includes some specific wording for inclusion on these invoices.
Businesses which offer prompt payment discounts will need to consider how they will change their invoicing and accounting systems to comply with the new requirements, and those which take advantage of discounts on their purchases will need to make sure that they reduce their VAT claims when they take a discount.