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20/01/2015

Critical Updates, Issue 67, January 2015

VAT - Prompt Payment Discounts

HMRC have now amended their initial guidance on what to do when you raise or receive a VAT invoice offering a Prompt Payment Discount (PPD) from 1 April 2015 when the change takes effect.

Guidance for suppliers:

a) on issuing a VAT invoice, suppliers will enter the invoice into their accounts, and record the VAT on the full price. If offering a PPD suppliers must show the rate of the discount offered on their invoice (Regulation 14 of the VAT Regulations 1995 (SI 1995/2518)).

b) the supplier will not know if the discount has been taken up until they are paid in accordance with the terms of the PPD offer, or the time limit for the PPD expires.

c) the supplier will need to decide, before they issue an invoice, which of the processes below they will adopt to adjust their accounts in order to record a reduction in consideration if a discount is taken up.

d) when adjustments take place in a VAT accounting period subsequent to the period in which the supply took place the method of adjustment needs to comply with Regulation 38 of the VAT Regulations 1995 (SI 1995/2518). [Haysden comment: basically, this means adjust either output VAT or input VAT, as appropriate.]

e) suppliers may issue a credit note to evidence the reduction in consideration. In which case, a copy of the credit note must be retained as proof of that reduction.

f) alternatively, if they do not wish to issue a credit note, the invoice must contain the following information (in addition to the normal invoicing requirements):

• the terms of the PPD (PPD terms must include, but not be limited to, the time by which the discounted price must be made)
• a statement that the customer can only recover as input tax the VAT paid to the supplier.

Additionally, it might be helpful for invoices to show:

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

g) if a business has adopted the option at (f), the VAT invoice containing appropriate wording as described above, together with proof of receipt of the discounted price in accordance with the terms of the PPD offer (eg a bank statement) will be required to evidence the reduction in consideration, and the reduction to the supplier's output tax (in accordance with Regulation 38 of the VAT Regulations 1995).

h) HMRC recommend businesses use the following wording on the invoice:
'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.'

i) if the discounted price is paid in accordance with the PPD terms, then the supplier must adjust their records to record the output tax on the amount actually received. If the full amount is received no adjustment will be necessary.

Guidance for customers:

On receiving an invoice offering a PPD a VAT registered customer may recover the VAT charged, in accordance with VAT Regulation 29 of the VAT Regulations 1995.

As adjustments may take place in a VAT accounting period subsequent to the period in which the supply took place the method of adjustment needs to comply with Regulation 38 of the VAT Regulations 1995 (SI 1995/2518). [Haysden comment: basically, this means adjust either output VAT or input VAT, as appropriate.]

In practice this will mean:

a) if the customer pays the full price they record it in their records and no VAT adjustment is necessary.

b) if the customer pays the discounted price in accordance with the PPD terms on receipt of the invoice they may record the discounted price and VAT on this in their accounts and no subsequent VAT adjustment is necessary.

c) if the customer does not pay when the invoice is first issued, they must record the full price and VAT in their records as shown on the invoice. If they subsequently decide to take up the PPD then:

• if they have received an invoice setting out the PPD terms which states no credit note will be issued they must adjust the VAT in their records when payment is made. They should retain a document that shows the date and amount of payment (eg a bank statement) in addition to the invoice to evidence the reduction in consideration.
• if the supplier's invoice does not state that a credit note will not be issued, the customer must adjust the VAT they claim as input tax when the credit note is received. They must retain the credit note as proof of the reduction in consideration.

Imports

The legislation in relation to prompt payments has not changed: section 21(3) of VATA 1994 still applies.

Payments outside PPD terms

Where a supplier receives a payment that falls short of the full price but which is not made in accordance with the PPD terms it cannot be treated as a PPD. The supplier must account for VAT on the full amount as stated on the invoice. If the amount not paid remains uncollected it will become a bad debt in the normal way. If a price adjustment is agreed later, then adjustment must be made in the normal way, eg a credit note.

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