How to Handle VAT on Discounts and Refunds in the UAE

Discounts Applied at the Time of Invoice

When a discount is offered and applied at the point of invoicing, the VAT is calculated on the discounted amount, not the original price.

If your standard project fee is AED 10,000 and you apply a 10% discount, your invoice should show the original fee of AED 10,000, the discount of AED 1,000, the net amount of AED 9,000, and the VAT of AED 450 (5% of AED 9,000).

Discounts Offered After the Invoice Has Been Issued

When a discount is offered after an invoice has already been issued and the VAT has already been accounted for in a previous VAT return, you cannot simply issue a new invoice for the reduced amount.

The FTA requires you to issue a Credit Note — a formal document that reduces the value of the original supply and the associated VAT. The Credit Note must reference the original Tax Invoice number and date, state the reason for the adjustment, and clearly show the reduction in the taxable amount and the corresponding reduction in VAT.

Refunds and Cancelled Supplies

When a service is cancelled and a full or partial refund is issued to a client, the same Credit Note mechanism applies. The original Tax Invoice is effectively reversed or partially reversed through the Credit Note, and the VAT previously accounted for is adjusted accordingly.

The VAT adjustment happens in the period the Credit Note is issued, not the period of the original invoice.

Early Payment Discounts

Early payment discounts — where you offer a client a reduced amount if they pay within a specified period — require careful consideration. If the client pays early and takes the discount, a Credit Note should be issued for the discount amount. If the client pays the full amount after the discount period, no adjustment is required.

Conclusion

Discounts and refunds are commercially valuable tools, but they require disciplined documentation. Issuing Credit Notes promptly and correctly, and reflecting them in the appropriate VAT return period, keeps your compliance record clean.

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