Be prepared for changes to prompt payment discounts

Business owners are reminded that HM Revenue & Customs (HMRC) has announced the rules surrounding VAT declaration on prompt payment discounts (PPDs) are changing from 1 April 2015. 

PPDs offer a reduction to the price of goods and services between a supplier and customer if the customer pays promptly. This is to encourage customers to pay after an invoice has been issued and ahead of the date that the full payment is due.

Under the current rules, suppliers offering a PPD are to charge and account for VAT on the discounted price, even if the full price (the undiscounted amount) is subsequently paid. This means that customers receiving PPD offers may only recover as input tax the VAT stated on the original invoice.

However, under the new rules due to come into force at the start of next month, suppliers must account for VAT on the amount they actually receive, while customers may recover the amount of VAT that is actually paid to the supplier.

Companies who supply broadcasting and telecommunication services underwent similar changes in May last year so this is a subject we’ve been watching closely. 

The only problem is that under the new rules, the initial invoice will not necessarily show the correct VAT figure because you do not know whether the customer has qualified for the discount.  HMRC has given some guidance and say that you can either issue a credit note and replacement invoice or issue a ‘one time only invoice’.  This means that the invoice shows VAT on the maximum price, but the customer has to claim only the level of VAT equal to what they end up paying under the discount terms.

For further details please contact Alan Taylor at the office.