VAT Rules Changing for Prompt Payment Discounts (PPD)

In last year’s Finance Act it was announced that the VAT rules for dealing with prompt payment (or early settlement) discounts would be changing from 1 April 2015. HMRC have now issued brief 49/2014 setting out guidance for businesses affected by the change, many of whom may need to change their invoicing procedures.

From 1 April 2015, output VAT will need to be calculated on the consideration actually received from the customer instead of the current rules where VAT is calculated on the value of the supply, net of any discount for prompt payment.

Let’s assume, for example, that you supply goods to the value of £100 but allow the customer a 2.5% discount if they pay within 30 days. Under the current rules VAT is charged on the discounted price of £97.50 not £100, whether or not the customer pays within 30 days.

From 1 April 2015, suppliers issuing a VAT invoice will enter the invoice into their accounts, and record the VAT on the full price. If offering a PPD, suppliers must show the rate of the discount offered on their invoice. The supplier will not know if the discount has been taken up until they are paid in accordance with the terms of the PPD offer, or the time limit for the PPD expires. The supplier will then have two options to deal with the discount:

1. they may issue a credit note to evidence the reduction in consideration
2. alternatively, if they do not wish to issue a credit note, they will need to adjust the output tax in their VAT return and the invoice must contain the following information:
a. the terms of the PPD (in particular the time by which the discounted price must be made).
b. a statement that the customer can only recover as input tax the VAT paid to the supplier.

Please contact us if you wish to discuss the effect of these changes on your invoicing and accounting procedures.

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