Currently when a business issues an invoice showing VAT calculated on a discounted amount but the discount isn’t taken up by the customer you don’t need to change the VAT amount.
For most customers that are VAT registered it is merely cash flow that is affected, as they can reclaim VAT paid on purchases anyway therefore it doesn’t matter to them how much VAT they are charged. However, for unregistered customers or those who are VAT exempt or partially exempt there’s a significant saving. Therefore those types of customers are likely to buy from a seller who offers artificially large prompt payment discount.
However changes are being made which will alter VAT calculations on discounted amounts. For supplies made after the 1st of April 2015 you can choose to issue an invoice showing the VAT on either the full or discounted amount. If the customers qualifies for the discount and you have charged the full VAT you must issue a credit note. But if you have charged VAT on the discounted amount and they don’t qualify for the discount you will have to issue another invoice for the extra VAT only.
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