Prompt Payment Discounts
Current Issues | VAT | 16th January 2015
Who is affected?
Any business that offers customers a reduced price for paying what they owe within a specified period of time, i.e. they offer a Prompt Payment Discount (PPD).
When will the new law take effect?
1 April 2015
What are the changes?
Where a business offered a prompt payment discount, the VAT legislation had allowed the VAT element of the supply to be calculated as if the customer had taken the discount regardless of whether they actually did so. No adjustment was necessary if the discount was not taken and the full price was paid.
Unfortunately this system was being abused so HM Revenue & Customs have been withdrawing it in two stages.
Stage 1 happened last year but only affected broadcasting and telecommunications providers who were supplying their services in situations where no VAT invoice needed to be issued.
Stage 2 is happening on 1 April 2015 and will affect all other businesses.
From that date VAT must be charged in full and the VAT effect of the offer of a PPD must be reflected in one of two ways:
- Issue a normal VAT invoice that charges VAT on the full selling price and issue a VAT credit note if the customer takes the discount.
- Issue a VAT invoice that shows both the full selling price and the discounted price and their related VAT elements.
The invoice must also show:
- The terms of the PPD; and
- A statement telling the customer that only the VAT element of the amount actually paid is recoverable as input VAT.
HM Revenue & Customs have produced some suggested text:
“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.”
In addition the business should retain evidence of the amount actually received from the customer, e.g. a bank statement.
What action should customers take?
The action to be taken by the customer depends on the format of the invoice received from the supplier.
If the invoice does not contain the additional wording noted above, the customer should process the invoice as normal and adjust the input VAT once the supplier’s credit note is received.
If the supplier fails to issue a credit note, the customer will still be obliged to repay some input VAT to HM Revenue & Customs if they have paid less than the full asking price under the bad debt relief rules.
If the supplier invoice does contain the additional text, the customer should adjust the amount of input VAT claimed according to the amount paid to the supplier and some evidence of the amount paid should be retained.
HM Revenue & Customs has published a Revenue & Customs Brief on the subject (RCB 49/2014)
Alternatively please speak to your usual Shipleys contact or to the VAT team.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to the above. If you would like advice or further information, please speak to your usual Shipleys contact.