Prompt Payment Discounts and VAT

I often give my customers prompt payment discounts as an incentive for them to pay me sooner, I find it works well. But I’ve been hearing that the rules about how to calculate the VAT are set to change. Is that true?

1st October 2014

VAT is normally accounted for on the price after a prompt payment discount has been applied; irrespective of whether the discount is eventually taken up or not. Prompt payment discounts would normally only occur in business-to-business transactions; where both parties are VAT-registered so the position is VAT-neutral from HMRC's point of view.

However, HMRC believe the rules have been abused by businesses offering prompt payment discounts to end consumers who are obviously not VAT-registered and therefore cannot recover the VAT. A prompt payment discount can therefore offer end consumers a real saving because there’s less VAT for them to pay.

As a result, the rules with regards to prompt payment discounts are set to change and in future, VAT will have to be calculated on the amount actually paid.

This measure already applies for supplies of telecommunication and broadcasting services where there is no obligation to provide a VAT invoice. For all other supplies the measure will have effect for supplies made on and after 1st April 2015.

If you’d like to discuss this further, please get in touch and we will put you in contact with your local TaxAssist Accountant.

By Jo Nockels

Disclaimer: Advice shared in this blog is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this forum, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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