A major change to the way businesses account for VAT on prompt payment discounts they offer to customers will take effect from 1 April 2015.
At present, businesses offering a PPD – for example, a five per cent reduction if payment is made within 14 days of the invoice date – can put on their invoice, and account for, VAT due on the discounted price, even if the full price is subsequently paid.
But from 1 April 2015, businesses offering PPDs will need to account for VAT on the amount they actually receive. HM Revenue & Customs (HMRC) has issued detailed guidance to businesses, which will now have two options:
- issuing invoices including VAT on the full price payable and indicating the discount available. If the discounted price is paid, the supplying business would then issue a credit note for the discount and VAT. Copies of credit notes must be retained as proof of the reduction
- if the business does not wish to issue a credit note, the invoice must, as well as the normal invoicing requirements, include the PPD terms and a statement that the customer can only recover as input tax the VAT paid to the business. HMRC says it might also be helpful for invoices to show:
- the discounted price
- the VAT on the discounted price
- the total amount due if the PPD is taken up
- and include the wording: “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.”
Moore Thompson partner Andrew Heskin said: “VAT is a notoriously complicated tax and this latest change adds a further layer of complexity, with the issuing of credit notes potentially increasing the risk of errors in VAT accounting.
“Businesses offering PPDs need to make sure their invoicing and VAT accounting systems are fit for purpose for the new regime. For more information and advice on VAT issues, please contact us.”