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VAT and discounts for prompt payment

Many traders offer a discount for prompt payment. Under current UK VAT rules, output tax is accounted for on the discounted price, whether or not the customer takes advantage of the discount.

Legislation in the Finance Bill 2014 proposes to amend the UK VAT legislation on prompt payment discounts so that it is aligned with EU legislation, taking effect from 1 April 2015. The amendment will ensure VAT is accounted for on the full consideration paid for goods and services where prompt payment discounts are offered, irrespective of whether or not the discount is taken up. This change will have a significant impact on invoicing, and credit notes may have to be issued to customers taking up the discount.

Although the start date is planned for 1 April 2015, HMRC have the power to bring the change in before that date for such supplies as may be specified.

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