If you make or receive prompt payment discounts, you need to read this.
HMRC has recently reminded us of its intention to remove one of the few gifts that it gives to taxpayers. The Taxman is not renowned for its spirit of generosity, but hitherto VAT registered businesses that provide prompt payment discounts to their customers have been allowed to treat the discounted amount as the consideration received, even if the discount was not taken. Historically, prompt payment discounts (PPD) tended to be offered to businesses that could recover all of the VAT charged, rather than consumers, and there was therefore little tax loss to the revenue in allowing this treatment. In recent times, there have been an increasing number of business the make supplies directly to the public that have begun to offer PPD. This has seen HMRC lose out as the end consumer is unable to recover the VAT leaving HMRC with less tax than if VAT had been charged on the full price paid.
From 1st April 2015, HMRC will expect all businesses to account for VAT at the appropriate rate based on the consideration actually received. A business will only know whether its prompt payments discount (PPD) offer has been taken up once payment has been made, and after a tax point has been created by the issuing of the original tax invoice detailing the PPD offer.
The supplier will need to decide, prior to issuing an invoice, which of the processes below they will adopt to adjust their accounts in order to record a reduction in consideration if a discount is taken-up.
Credit note option:
The supplier can issue a credit note to the customer if the discount is taken up. The credit note would flow through the accounting systems of the supplier and customer in the usual way, the undiscounted value of the original invoice having been booked by both in the first place on their systems; or
Invoice statement option:
If a supplier does not wish to issue a credit note, the sales invoice must contain the following information.in addition to the normal invoicing requirements:
- the terms of the PPD (PPD terms must include, but need not be limited to, the time by which the discounted price must be made),
- a statement that the customer can only recover as input tax the VAT actually paid to the supplier.
Additionally, HMRC suggest that the following is also stated on the invoice although this is not compulsory
- the discounted price
- the VAT on the discounted price
- the total amount due if the PPD is taken up.
Should you wish to discuss this, or indeed any other VAT issue, please contact Gill Yates on 0845 177 5500 who will be happy to assist you, or use our on-line contact form.