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03.02.2015

Change in dealing with VAT on Prompt Payment Discounts

On April Fools Day 2015, businesses may need to change the way in which they deal with VAT on Prompt Payment Discounts.

What Are the Changes?

Currently, where a business offers a prompt payment discount the VAT legislation allows the VAT element of the supply to be calculated as if the customer has taken the discount regardless of whether they actually do so or not. No adjustment was necessary if the discount was not taken and the full price was paid.

April 1HM Revenue & Customs have been withdrawing this method since April 2014 and the latest stage of this change will happen on 1 April 2015. From that date VAT must be charged in full and the VAT on Prompt Payment Discounts must be reflected in one of three ways:

  1. If the discounted price is paid in accordance with the terms before the invoice is issued, the invoice should show the discounted price paid.
  2. Issue a normal VAT invoice that shows the terms of the Prompt Payment Discounts and charges VAT on the full selling price and then issue a VAT credit note if the customer takes the discount.
  3. Issue a VAT invoice that shows the terms of the Prompt Payment Discounts and that shows both the full selling price and the discounted price and their related VAT elements.  The invoice must also include a statement telling the customer that only the VAT element of the amount actually paid is recoverable as input VAT.  Suggested text has been prepared by HMRC. 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.

resources-appFurther Information

HM Revenue & Customs has published a Revenue & Customs Brief on the subject (RCB 49/2014) which is available on their website( https://www.gov.uk/government/collections/revenue-and-customs-briefs).

Alternatively please speak to your usual Croucher Needham contact if you would like further advice.  Specific advice should be obtained before taking action, or refraining from taking action, in relation to the above.

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