New rules on the treatment of VAT prompt payment discounts (PPDs) come into effect on 1 April 2015. The changes are being introduced to ensure protection of the revenue and compliance with EU legislation.
Currently businesses offering PPDs are only required to account for VAT on the discounted price regardless of whether or not the customer actually takes up the discount. However from 1 April 2015 VAT must be accounted for based on the payment actually received.
(N.B. the change was implemented from 1 May 2014 for suppliers of broadcasting and telecommunication services not obliged to issue VAT invoices.)
From April suppliers issuing VAT invoices will be required to account for VAT on the full price of the goods or services provided. The invoice must show the rate of any PPD offered.
Additionally suppliers have the option of two possible methods for dealing with the required VAT adjustment where customers take up the offer. Either a VAT credit note is subsequently issued to the customer to evidence and account for the VAT reduction, or the original invoice includes the following additional information:
- the terms of the PPD, including the time period within which the discounted price must be paid, and
- a statement that the customer is only permitted to recover the VAT amount actually paid to the supplier.
In the case of the second option HMRC guidance suggests the following information also be shown on the invoice:
- the discounted price,
- the VAT on the discounted price,
- the total amount due if the PPD is taken up.
It is recommended that the following wording appears on the invoice:
“A discount of X% of the full price applies if payment is made within Y days of the invoice date. No credit note will be issued. Following payment you must ensure you have only recovered the VAT actually paid.”
Upon receipt of the discounted payment from the customer the supplier must make the necessary VAT reduction to their records.
Suppliers need to ensure that any system changes required to their billing and accounting systems to comply with the new rules are implemented for April 2015.
For additional information on the new requirements see HMRC Revenue and Customs Brief 49 (2014) https://www.gov.uk/government/publications/revenue-and-customs-brief-49-2014-vat-prompt-payment-discounts/revenue-and-customs-brief-49-2014-vat-prompt-payment-discounts.