We take a look at what is changing

Historically, where a prompt payment discount (PPD) is offered on an invoice, businesses with the exception of certain telecommunications and broadcasting businesses who already had these changes implemented back on 1 May 2014, have been able to account for output tax on the discounted value of supply, whether the customer pays in time or not.

(Example:

Goods £1000
Vat £200
Total £1200

Historically some businesses would issue invoices which had already taken into account the prompt settlement as follows:

(using a 20% discount)

Goods £800
Vat £160
Total £960

However, from 1 April 2015 the VAT rules relating to prompt payment discount changed, in order to align UK legislation with that of the EU. These changes mean that invoices must now only be submitted for the full amount together with the full rate of applicable VAT and thereafter adjustments made when the discount terms are met.

There are now 2 options open to suppliers for dealing with these adjustments:

1. The first option is to issue a credit note but this has proved unpopular with many businesses due to the extra admin involved.
2. If a supplier does not want to issue a credit note they must instead provide additional details on their invoice. This includes:
   a. adding the terms of the PDD which must include, but are not limited to, the time by which the discounted price must be paid and,
   b. adding a statement that the customer can only reclaim as input tax the VAT they paid to the supplier.

HMRC have suggested the following wording for invoices:

“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.”

HMRC have also suggested that invoices should also show:

• the discounted price
• the VAT on the discounted price
• the total amount payable if the PPD is taken up

Proof of receipt of the discounted price will be required to support the reduction to the supplier’s output tax/sales value. If the full amount is received and/or the discount is not taken-up then no adjustment is necessary. Any suppliers who offer a PDD should therefore ensure that their accounting and invoicing systems are able to cope with these changes.

Customers receiving offers of PPD

• Record the full amount of VAT as the full amount is paid
• If the discounted amount is paid in the correct time frame then the discounted amount of VAT should be recorded instead
• If the invoice is not paid immediately on receipt then the full amount of VAT should be recorded. If, subsequently the discount is taken up then the invoice should be checked to see whether the supplier will offer a credit note and if not, adjustments will need to be made ensuring where you claim VAT on the discounted rate that you can provide evidence to support this.
• Due to this change in practice customers who are unable to reclaim all the VAT they incur due to the fact that they are not VAT registered or are partially exempt for example are likely to suffer additional VAT costs if they do not comply with discounted terms.