VAT Prompt payment discount / settlement discount

missieamy Registered Posts: 13 Regular contributor ⭐ ? ⭐
The VAT legislation relating to settlement discount changes on 01.04.2015.
The VAT charged on supplier invoices will no longer discount the VAT to take account of the settlement discount.
Does anyone know if when taking the discount a VAT adjustment needs to be made?
Our supplier is not issuing a VAT credit note for the discount deducted.


  • Gem7321
    Gem7321 MAAT, AAT Licensed Accountant Posts: 1,438
    Yes an adjustment has to be made so that VAT is accounted for on what was actually paid. If your supplier is not going to issue a credit note the invoice should state (from 1 April) the terms of the PPD and a statement that the customer can only recover as input tax the VAT paid to the supplier.

    This is an extract from the Revenue & Customs Brief 49:

    b) if the customer pays the discounted price in accordance with the PPD terms on receipt of the invoice they may record the discounted price and VAT on this in their accounts and no subsequent VAT adjustment is necessary.

    c) if the customer does not pay when the invoice is first issued, they must record the full price and VAT in their records as shown on the invoice. If they subsequently decide to take-up the PPD then:

    if they have received an invoice setting out the PPD terms which states no credit note will be issued they must adjust the VAT in their records when payment is made. They should retain a document that shows the date and amount of payment (e.g. a bank statement) in addition to the invoice to evidence the reduction in consideration.

    if the supplier’s invoice does not state that a credit note will not be issued, the customer must adjust the VAT they claim as input tax when the credit note is received. They must retain the credit note as proof of the reduction in consideration.
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