How to record the VAT on Cash Back
The cashback will be treated as other income for accounting purposes. However, HMRC’s notice 700/7 explains that the VAT registered customers need to reduce their input tax if they are claiming a cashback provided by the manufacturer of the product. It is better to receive this cashback in your business bank if the purchased item is for business use.
In this scenario, the manufacturer of the product is giving you a credit not the bank or credit card company so the transaction will reduce the value of the purchase. Hence it is better to consider this cashback as a refund against your initial purchase. Which will reduce the value of the purchase and will also reduce the input tax claimed on it.