Category Archives: Latest VAT news

VAT – Prompt Payment Discounts; new rules

By   19 January 2015
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The rules on how VAT is accounted for on prompt payment discounts (PPD) will change on 1 April 2015.  Currently, suppliers offering a PPD are able to account for output tax on the discounted price, even if the PPD is not taken up by the customer.

From April, suppliers must account for output tax on the amount actually received.

This will entail changes to accounting processes for, and recovering VAT when a prompt payment discount is offered and taken up, and the new rules provide for an alternative to issuing credit notes.

HMRC Brief 49 is here; https://www.gov.uk/government/publications/revenue-and-customs-brief-49-2014-vat-prompt-payment-discounts/revenue-and-customs-brief-49-2014-vat-prompt-payment-discount

And I have reproduced it in full below:

HMRC Brief 49

1.Introduction

PPD VAT legislation was amended earlier this year. This brief provides guidance on what to do when you raise or receive a VAT invoice offering a PPD from the 1 April 2015 when the change takes effect.

2.Who needs to read this?

Suppliers who offer and customers who receive PPD where an invoice is issued.

3.Background

A PPD is an offer by a supplier to their customer of a reduction in the price of goods and/or services supplied if the customer pays promptly; that is, after an invoice has been issued and before full payment is due. For example a business may offer a discount of 5% of the full price if payment is made within 14 days of the date of the invoice.

  • at present, suppliers making PPD offers are permitted to put on their invoice, and account for, the VAT due on the discounted price, even if the full price (i.e. the undiscounted amount) is subsequently paid. Customers receiving PPD offers may only recover as input tax the VAT stated on the invoice.
  • after the change, suppliers must account for VAT on the amount they actually receive and customers may recover the amount of VAT that is actually paid to the supplier.

Changes were made to UK legislation in the Finance Act 2014 in order to protect the revenue, and put it beyond doubt that UK legislation is aligned with EU legislation. The new legislation is at paragraph 4 below.

The change took effect on 1 May 2014 for supplies of broadcasting and telecommunication services where there was no obligation to provide a VAT invoice. For all other supplies the change takes effect on 1 April 2015.

A consultation took place between 17 June and 9 September 2014 asking businesses for their views and suggestions on how the changes should be implemented. In particular whether issuing credit or debit notes to evidence a change in the consideration would cause them difficulties. The Summary of Consultation Responses was published shortly after Autumn Statement 2014. We accepted that an alternative to issuing credit or debit notes was needed (see guidance below).

4.The New Legislation

The revised paragraph 4, Schedule 6, VATA 1994 is set out below:

4 (1) Sub-paragraph (2) applies where. (a) goods or services are supplied for a consideration which is a price in money, (b) the terms on which those goods or services are so supplied allow a discount for prompt payment of that price, (c) payment of that price is not made by instalments, and (d) payment of that price is made in accordance with those terms so that the discount is realised in relation to that payment. (2) For the purposes of section 19 (value of supply of goods or services) the consideration is the discounted price paid.

5.Guidance

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).

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 need 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 (e.g. 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) we 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.

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).

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 (e.g. 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 on imports 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 e.g. a credit note.

For more information please contact us.

What is the value of a sale for VAT? – Prompt Payment Discounts

By   15 December 2014
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The value of a supply is crucial for VAT.

The area of discounts has always been problematic, particularly in respect of prompt payments discounts (which customers sometimes do, and sometimes do not take advantage of).

HMRC has clarified the position and has published:  which confirms that from 1 April 2015, all businesses that offer Prompt Payment Discounts will be obliged to account for VAT on the sum actually received in return for the goods or services supplied (rather than the reduced value offered – as is the current position).

VAT – Hard or soft? Stiff or floppy?

By   12 November 2014
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Sssshh at the back, this is important!

Whether cakes and biscuits go hard or soft when stale helps to determine whether they are indeed cakes or biscuits (cakes go hard, biscuits go soft). This is the difference between VAT at 20% and zero rating for some products.

Whether printed matter is stiff or floppy can also result in either 20% or zero rated treatment. In this case, for single sheet products, eg; leaflets; limp is good and hard can result in the VAT hit.

What did you think I was talking about? Stop making your own jokes up!

MOSShop opens!

By   7 October 2014
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Just a reminder that the Mini One Stop Shop (MOSS) will open on 20 October 2014.

The MOSS is for suppliers of digital services to customers across the EC.

Official notification here

A full explanation of MOSS and digital supplies here

We advise that any provider of; telecoms, broadcasting and electronic services seeks specialist professional advice before the changes come into effect.  We have many clients that are involved in cross-border provision of digital services so are ideally placed to assist with whatever query you may have on this issue.

Holding companies in VAT groups and input tax recovery

By   29 September 2014
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Care must be taken when considering the recoverability of input tax incurred by a holding company.

In the past holding companies which were members of a VAT Group were treated in the same way as any other member of the group. As a result, input tax incurred by the holding company were recoverable by reference the the VAT group’s (as a whole) recovery position.

As a result of the recent Court of Appeal judgement in the case of BAA Ltd HMRC have announced an updated policy HERE

The revised policy is that that input tax is only recoverable by holding companies where it is incurred in the course of an economic activity and there is a direct and immediate link to taxable supplies, This means that a passive holding company cannot now rely solely on its membership of a VAT group to recover input tax.  For recovery, the VAT must be incurred in respect of taxable supplies made by the holding company itself.

For information on the impacts on this change – please contact us.

With the Scottish vote approaching….

By   10 September 2014
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What happens if Scotland gains independence?

A VAT what if….

If the Scots vote for, and gain, full independence from the UK, it is likely that the country will become a separate Member State of the EU. According to David Cameron; It’s currency will become the Euro and it will need to form its own authority for administering VAT. Although cross border controls will not be introduced, the VAT treatment of cross-border transactions will change significantly. Apart from the usual currency exchange issues, UK businesses will also be required to complete additional EC Sales Lists, Intrastat Declarations, and potentially a lot of other administrative and statistical documentation.

UK businesses will also need to determine the status of its Scottish customer, which in turn will establish the place of supply, which will dictate whether UK VAT, Scottish VAT, or no VAT is chargeable. Then there are the Distance Selling rules to consider. Some UK businesses will be required to register in Scotland as well as the UK if they sell goods by mail order. And don’t forget the changed VAT treatment of goods and services purchased from Scotland; in most cases a UK reverse charge will be applicable. Depending on circumstances though, UK businesses and residents will incur Scottish VAT and if they do, only some will be able to recover it. This will not be via a usual UK VAT return, but via an alternative VAT claim method which also adds complexity. Then there is the increase in triangulation cases, never the most straightforward VAT subject!

A simple supply from Carlisle to Ayr would will need to be analysed with a massive amount more information required plus the additional bureaucratic form filling. This added complexity will also increase the possibility of errors on which penalties will be levied.

John Swinney, the cabinet secretary for finance in the Scottish Government has pointed out that an independent Scotland would be able to choose its own levels of income tax and VAT, as well as taking control of other sources of revenue such as alcohol and tobacco duty, air passenger duty and landfill tax.

From a practical point of view, will shops and other business establishments in the North of England start accepting both Sterling and Euros? Will invoices routinely show both Sterling and Euro values? Will excise and duty rates be similar to the UK? Will there be opportunities for enterprising individuals to take advantage of any differences? Will we see smugglers coming up against modern day Robert Burns in his Exciseman incarnation? At what rate will the Scots set VAT? Will it be possible that cross border VAT rate shopping will take place? Will the Scots lose the zero rating reliefs which they currently enjoy as part of the UK? Will the Scottish people be forced to pay VAT on new houses, food, books and children’s clothing after independence? One thing is for sure, the Scots will need a whole new set of domestic legislation to cover VAT and indirect taxes.

Also: What about groups of companies with Scottish and English subsidiaries currently in the same UK VAT Group? Were independence to happen, it would be a riot unpicking that lot.

Good luck everybody!

Follower Notices – a new HMRC weapon with a potentially dire impact on taxpayers

By   17 July 2014
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From Royal Assent of Finance Bill 2014 (expected within the next week) HMRC has a new weapon which challenges a taxpayer’s basic right to have its case heard by a Court.

This is by the introduction of “Follower Notices”. The new power allows HMRC to order one taxpayer to settle their dispute when, in HMRC’s view, a decision in another case is relevant to the issues in the first taxpayer’s case.  Since taxpayer’s circumstances are unlikely to be identical to another’s, the question of which decisions are relevant involves difficult decisions on issues of interpretation and questions of fact. These are points that ought to be considered by the Court, not unilaterally by one of the parties to the litigation.

A Follower Notice gives the taxpayer 90 days to concede its dispute and pay HMRC’s estimate of the tax due. The taxpayer has only limited rights to challenge the notice, and even then any such challenge is considered by HMRC and not the Court.

If the taxpayer does not concede following HMRC’s issue of a Follower Notice, additional penalties are levied. These penalties not only significantly increase the amount which the taxpayer has at stake in the dispute but must be challenged separately.

It is clear that the changes intend to reduce the backlog of similar disputes. However, these new rules are completely one-sided and has created an environment for yet further litigation and acrimony.

Please contact Marcus if you would like to discuss this further.

Changes in VAT policy relating to the transfer of a going concern (TOGC) of buildings

By   16 July 2014
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HMRC has announced two important changes to the transfers of a businesses as a going concern (TOGC) rules as they relate to property after the case of Robinson Family Ltd.  These may be summarised as follows:

  1. Where the transferor of a property rental business grants a lease and retains a ‘sufficiently small’ reversionary interest in the property transferred the transaction will be a TOGC for VAT purposes if the usual conditions are satisfied. HMRC now accept that the surrender of a lease can be a TOGC for VAT purposes. This will apply where a tenant who is sub-letting premises subsequently surrenders its interest in the property together with the benefit of the sub-lease. In these cases HMRC accept the landlord has acquired the tenant’s business.
  1.  There is also a change in the treatment of TOGCs of new residential and relevant charitable buildings. The first grant of a major interest in residential or relevant charitable property by the ‘person constructing’ is zero-rated. HMRC has historically taken the view that ‘person constructing’ status does not move to a person acquiring a completed building that is the subject of a TOGC. HMRC now accepts that a person acquiring a completed residential or charitable development as part of a TOGC inherits ‘person constructing’ status and is capable of making a zero-rated first grant of a major interest in that building. This also applies in respect of ‘person converting’ status (for buildings converted from non-residential to residential use) and ‘person substantially reconstructing’ status (for substantially reconstructed listed buildings).

Please contact us if you have sold property in the past that may now benefit from TOGC treatment – claims are possible for overpaid VAT and SDLT.

For our property services please see here