VAT and discounts

Andrew Needham looks at what impact different types of discounts can have on the VAT due, and how and when the VAT is accounted for.

 

There are a number of different discounts commonly offered by businesses. The most common B2B discounts are prompt payment discounts (PPDs) and volume or turnover-based discounts, and retailers will offer money off discounts or participate in manufacturer-based promotion schemes.

 

PPDs offer customers a discount if payment is made within a certain time period. Until 1 April 2015, VAT was calculated on the discounted amount whether or not the discount was taken up. HMRC identified a potential tax loss and changed the rules.

 

Following these changes, a business has to account for VAT on the amount actually received, which can be administratively cumbersome. Suppliers will need to decide, before they issue an invoice, which of the two procedures below they will adopt to adjust their accounts in order to record a reduction in consideration if a discount is taken up:

 

• issue a VAT invoice for the full value of the supply plus VAT and include the offer of a discount for prompt payment, showing the rate of the discount offered. The supplier will not know if the discount has been taken up until they are paid in accordance with the terms of the PPD offer or the time limit for the PPD expires.
• if the discount is taken up, a credit note (or equivalent) must be issued to evidence the reduction in consideration. A copy of the credit note must be retained as proof of the reduction.
• issue an invoice containing the following information (in addition to the normal invoicing requirements):
• the terms of the PPD;
• a statement that the customer can only recover as input tax the VAT paid to the supplier.

If a business adopts the second option, the VAT invoice and proof of receipt of the discounted price in accordance with the terms of the PPD offer (e.g. a bank statement) are required to evidence the reduction in consideration and the reduction to the supplier’s output tax. 

 

Prompt payment discounts should not be confused with turnover discounts or volume rebates. These are only earned after the event, being based on the value of purchases by the customer over a stated period of time. The price to the customer is then reduced by a credit note. 

 

It is up to the supplier and the customer to agree whether VAT should be added to the value of the credit. Naturally, a customer who was unable to recover the original VAT will want it to be included on the credit note.

 

Where a retailer offers a discount to customers, VAT is only due on the amount actually received. Therefore, if a retailer offers money off coupons or ‘buy-one-get-one-free’, VAT is only due on the amounts actually received. 

 

However, where a retailer participates in a manufacturer’s discount scheme and reimbursed the discount given, VAT will be due, and the full amount received from both the customer and supplier. This means that where a manufacturer provides a discount to the final customer (e.g. where a money off coupon is provided and the retailer reduces the consideration paid by the customer), VAT is initially due on the amount received; when the retailer claims the discount back from the manufacturer, this is added back into the takings figure and VAT accounted for then.

 

The VAT due and reclaimable on discounts is now always based on the amounts actually paid.