Recording VAT on Prompt Payment Discounts on Sales Invoices for United Kingdom
Changes to United Kingdom legislation on prompt payment discounts require VAT to be charged on the full invoice price for supplies made on or after April 1, 2015.
Under current rules, for invoices dated before April 1, 2015, VAT is applied on the discounted price offered for prompt payment regardless of when the customer pays the invoice.
Beginning April 1, 2015, VAT must be applied on the full price, not on the discounted price, on invoices for which a discount is taken for prompt payment.
If you are a vendor, and your customer takes up the prompt payment discount after the invoice has been issued, you must adjust the VAT amount to reflect the actual payment that you received. HMRC recommends that you do this by issuing a credit memo or a revised invoice, and making the necessary adjustments to your accounting records.
Customers must also enter these adjustments in their records to ensure that what they are claiming is the actual VAT that was charged. See Recording VAT on Prompt Payment Discounts on Purchases for United Kingdom
If the customer takes up the prompt payment discount before the vendor issues the invoice, the invoice should show the discounted price that was paid.