VAT SERVICES
(scotland) Limited
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Changes to the VAT treatment of prompt payment discounts are now impacting on businesses.

We first provided news on the updated VAT rules covering Prompt Payment Discount ('PPD') last June. It has only been since the changes were actually introduced earlier this month that we are now receiving queries regarding accounting for VAT on prompt payment discount under the new rules.

Up to 31 March 2015, businesses offering PPD only accounted for VAT on the discounted price, even where the full price was subsequently paid.

The new changes to the VAT treatment of PPD became effective, in the main, for businesses at the beginning of this month on 1 April 2015 (the change was implemented with effect from 1 May 2014 for business to consumers i.e. B2C supplies of telecommunication and broadcasting services where there is no obligation to provide a VAT invoice).

Since the beginning of this month, businesses must now account for VAT on the amount that they actually receive rather than the discounted price. From the queries we have received, it is evident that many businesses do not know how much VAT to charge when they are raising their sales invoices as the supplier, or receiving PPD as a customer, and how to account for the PPD under the new changes.

In HMRC's Revenue and Customs Brief 49(2014), it suggests two different processes for the VAT accounting. These are:

  • 1.  For a business to issue a sales invoice for the full amount of VAT on the full price (i.e. pre-discounted net sales value) showing the rate of the PPD offered on the invoice and, if the PPD is taken up, issue a credit note for the difference; or
  • 2.  For a business to issue a sale invoice, again for the full amount of VAT on the full price, but ensuring it contains the terms of the PPD (which must include, but not limited to, the time by which the discounted price must be made), together with narrative such as 'the customer can only recover as input tax the VAT paid to the supplier'.

If the customer complies with the terms of the PPD and takes the discount on payment then no credit note is required to be issued (i.e. process 2 above) by the business. However, the VAT should be accounted for on the lower discounted amount received. In this case, the business (as a supplier) is required to be able to provide a copy of the sales invoice and prove the receipt of the discounted amount (for example, a bank statement) should HMRC challenge the reduced VAT amount that has been declared.

Of the two processes outlined by HMRC, the less burdensome approach appears to be process 2. However, the risk of accounting for the VAT under process 2 is that the customers may take up the discount even when they have not complied with the terms of the PPD. Additionally, the business may not make the full disclosure of the terms of the PPD on the sales invoices to allow process 2 to be fully complied with. Either action, would give the business a VAT exposure and corrective action which may cover:

  • a need to raise credit notes if the business agrees to allow a discount outside the PPD terms;
  • for the business to account for more VAT than what has actually been paid; or
  • following up with the business' customers for the additional sums due where the PPD conditions have not been met.

Additionally, although the VAT accounting under process 2 will not require the issue of credit notes, there is still a significant accounting issue in adjusting the original sales price from the PPD invoice to the discounted amount where the PPD is taken up by the customer. Generally, we expect that this will involve journal entries to be made.

For businesses receiving PPD it is important to ensure that the VAT being claimed is the correct amount and adjustments are made depending on whether the terms of the PPD are met.

For completeness, HMRC's brief included an example PPD invoice with HMRC's recommended wording and calculation format, which we attach as a link here

Who is potentially affected?

  • Businesses that offer PPD as a supplier and/or receive PPD as a customer.

How can VAT Services (Scotland) Ltd help you?

  • To assist your business with the necessary VAT invoicing and accounting arrangements to ensure it is compliant with the new changes that have been effective from 1 April 2015.

 

Contact us

Should you wish further information on the above, please do not hesitate to contact Gary using the details outlined below.

 

Gary Moore
Direct line 0141 636 9353
Mobile 07812 061 582
Email This email address is being protected from spambots. You need JavaScript enabled to view it.