Do you offer prompt payment discounts to clients? VAT changes from April 2015

Do you offer prompt payment discounts to clients? VAT changes from April 2015

Businesses who offer prompt payment discounts (PPD) to their customers need to be aware that there were some changes that came into force in April 2015.

From 1 April 2015, VAT must be charged on the value of the supply without the inclusion of the prompt payment discount and the VAT adjusted if and when the discount is taken up.

Previously, under UK law, VAT was payable on the net amount after deducting the discount, whether or not the customer took advantage of the PPD and paid promptly.

Example

If you sell some goods for £1,000 plus VAT and offer 5% discount if the customer pays within 10 days then VAT is charged at 20% on £950 being £190, rather than 20% of £1,000 which is £200. Even if the customer takes 30 days to pay and therefore does not qualify for the PPD, the amount due will be £1,190.

From 1 April 2015 VAT is due on the amount the customer actually pays. So using the above example if the customer fails to take advantage of the PPD he would need to pay the full £1,000 plus VAT of £200.

The business making the supply will have to issue a credit note to account for the PPD where this is taken up. So using the same example if the customer takes up the discount then the credit note would be for £50 plus £10 VAT.

Prompt payment discountApparently PPD have been widely used by suppliers of telecommunications and broadcasting services and so the use of PPD to reduce VAT due has already been blocked in those sectors from 1 May 2014. This applies where the customer cannot recover the VAT charged.

What should you do?

If your business currently offers PPD you may need to change your invoicing procedures from 1 April 2015.

  • Those offering discounts need to amend their invoicing templates and potentially accounting systems to ensure the correct VAT amount is charged to their customers and reported to HMRC.
  • You should also inform your customers of the changes
  • Those receiving prompt payments will need to ensure they record the VAT they can recover correctly

Contact us

Contact us if you would like to speak with our experienced VAT consultant about these changes or find out more about our VAT consultancy services.

150 150 Rouse Partners

Nicola Gladwell

With a career in VAT spanning over 20 years, Nicola advises businesses of all sizes; from start-ups to major international organisations. See more

All stories by : Nicola Gladwell

This information has been produced by Rouse Partners LLP for general interest. No responsibility for loss occasioned to any person acting or refraining from action as a result of this information is accepted by Rouse Partners LLP. In all cases appropriate advice should be sought before making a decision.

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