VAT on Early Settlement Discounts

To tie in with the EU VAT directive, the long standing VAT rule regarding early settlement discounts is changing from the 1st April 2015.

The current method is to calculate the VAT assuming that the customer pays within the agreed time and, therefore, receives a discount. If the customer fails to receive the discount the VAT is not recalculated and is still charged on the discounted price.

The new legislation will require the supplier to calculate the VAT on the full price and then, if the customer qualifies with the terms for the suppliers discount, the VAT can be adjusted. This will add an extra level of paperwork to suppliers who offer the early settlement discounts and will make them less common.