If you offer a discount to your customers for paying promptly, the rules for how you charge and record the discount in your VAT accounts have become more complex.
An example would be to offer a prompt payment discount (PPD) of 5% of the full price, if payment was made within 14 days of invoice date. If the goods supplied were for £1,000 (20% standard VAT rate), VAT on the invoice could previously be charged at £190 (£1,000 less 5% discount x 20%) rather than £200 (£1,000 x 20%). Whether the customer took up the discount or not the VAT payable would stay at £190 in both cases.
The VAT treatment has now been brought into line with the Principal VAT Directive, which requires VAT to be accounted for on the consideration actually received. The change applies generally to businesses that offer a PPD on invoices raised or received from 1 April 2015. The change does not apply to imports.
On issuing a VAT invoice a business will have to record the VAT on the full price in their accounts. If offering a PPD, suppliers must show the rate of the discount offered on their invoice. If the PPD is taken up then the supplier will have to make an adjustment in their accounts to reflect the reduced consideration.
In addition, the supplier will have to decide which of two processes it will undertake to inform the customer that the PPD has been validly claimed and the reduced VAT payment accepted. This can be done either through formally issuing a credit note or an approved statement on the original invoice. An example of this would be: ‘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.’
If you have any questions about what this change means for your accounting procedures, please contact us.