VAT – Prompt Payment Discounts (PPD) changes to valuation from 1 April 2015

By   19 February 2015

VAT – Prompt Payment Discount Changes

Businesses don’t have much time to change their accounting procedures and systems to deal with the new PPD rules.  A recent survey has shown that over 13% of business will be affected by the changes which do not appear to have been given much publicity. These changes are necessary to align UK legislation with the EC Principal VAT Directive.  It is crucial that advisers and businesses are not caught out by the change in valuation of supplies offered at a discount.

The changes – summary

Old Rules

Under the previous rules output tax was due on the discounted price offered for prompt payment – regardless of whether the customer takes up the discount.

New Rules

From 1 April 2015 output tax is due on the full consideration actually paid by the customer when PPD is offered.

The new rules are required because HMRC is concerned that there was a difference between output tax paid on the discounted price, and the (higher) amount received if a PPD is not taken.  Historically, this was not so much of an issue because most PPD was offered B2B and the VAT was generally recoverable by the recipient of the supply.  However, increasingly, PPD is now offered B2C and therefore reduces “sticking tax” and the consequential VAT loss for HMRC.

A simple example

Old Rules

B2B PPD of 10% if invoice paid within 21 days.

Goods                                          £10,000

VAT 20% on £9,000                     £1,800

Invoice Total                               £11,800

Both parties post £1,800 to VAT account and there is no adjustment if discount not taken.

New Rules

Using the above figures:

Must assume discount is not taken so invoice total = £12,000

If customer actually takes up PPD a credit note is issued for both elements of the supply – £200 credit for the VAT.

Both parties process the new documentation to adjust the original invoice – VAT is neutral.

This increases a business’ administrative burden and also creates a significant additional risk of penalties and interest if businesses are ignorant of the change, or implement the changes incorrectly.

One Comment on “VAT – Prompt Payment Discounts (PPD) changes to valuation from 1 April 2015

  1. Marcus Ward Post author

    UPDATE

    HMRC has issued guidance on the new rules, and have produced a way that will remove the administrative burden of having to issue endless credit notes on traders offering prompt payment discounts:

    HMRC has confirmed that it will allow traders to issue one invoice without the need to issue a credit note if the discount conditions are met. If this is going to be used, the invoice issued needs to make clear the discount conditions, including the time by which the payment must be paid to qualify, and a statement that only the amount paid can be recovered as input VAT. It may also be useful to show the discounted price, the VAT thereon, and total amount due if the discount is taken up.

    In addition to the above, if the conditions are met and the discount is taken up, the taxpayer will also need to have evidence that the discount conditions have been met, and this needs to show the date and the payment made (e.g. a bank statement would be sufficient).

    If the discount fulfilment spans the end of a VAT period, then the VAT has to be accounted for as normal in that period, and then an adjustment is made if the conditions are later fulfilled.

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