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No more reconciling supplier credit notes. No more fearing visits from the VAT man. No more problems.

VAT on Early Settlement Discounts - Everything you need to Know

How do Early Settlement Discounts affect VAT in practice?

Well this has not always been straightforward and even HMRC has recently changed it's mind. In April 2015 discounts were subject to a change in regulation regarding; 1) how much VAT is due when a discount is offered and 2) how that VAT is accounted for in both parties’ ledgers once the discount parameters are satisfied.

So how was Early Settlement discount handled before April 2015?

Before the change, suppliers applied VAT on the discounted invoice amount regardless of whether or not the early payment was made. To make the numbers easy, lets use an example of a 10% discount for early payment:


In the example above, you assume the 10% early payment discount is achieved and therefore VAT is calculated on £90k rather than £100k. The supplier would then issue a £10k credit note if payment is made early.

The problem? Well this reduces HMRC’s VAT income, which they weren’t too happy about – cue legislation change!

How are Early Settlement Discounts handled now?

Since April 2015, the invoicing procedure for goods with a discount has now been extended to make accommodations for VAT adjustments. Instead of issuing a VAT figure that assumes the discount is achieved, suppliers must now issue invoices assuming that the goods will be paid for in full.


So now, the invoice would be for £120k, rather than £118k as before.

Now if early payment is made, HMRC advises that the supplier issue a credit note for both the price of the goods and the adjustment in VAT due (£10k discount + £2k VAT credit). Once both parties process the paperwork in their respective accounting systems, the debits and credits will match and balance in the universe is restored.

So how can Xelix help?

Our platform makes life easy for both parties. Instead of the supplier issuing a credit note after the discount is accepted, the Xelix platform automatically provides both parties with appropriate accounting journals and documentation to ensure the discount and the VAT are correctly reconciled on both sides.

No more reconciling supplier credit notes. No more fearing visits from the VAT man. No more problems.

If you want to find out more about how the Xelix can simplify your discounting process get in touch below!

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