Since 1 April 2015, if you offer a prompt payment facility on your invoices you must account for VAT on the 'goods value' of the invoice.
These new rules bring the UK into line with the EU and they have implications for how you should format your invoices and record the VAT.
Under the old rules, suppliers could offer a prompt payment discount and show this on the invoice with the VAT applied.
For example, a £1000 invoice with a 10% prompt payment discount, would be liable to VAT at £180 rather than £200.
Even if customers paid too late to qualify for the discount, only the VAT on the discounted amount was charged. HMRC believed that this scheme was being abused and so has introduced new rules to ensure that VAT is accounted for at the actual rate it is received.
Since 1 April 2015, VAT is now due on the price that is actually paid.
EG: If the customer doesn't take up the prompt payment discount on the £1000 invoice, they must pay the full £200 VAT.
HMRC had originally advised that credit notes (or replacement invoices) would need to be issued to any customer taking up the prompt payment discount.
Businesses appealed for this to be changed, arguing that the new rules would create a disproportionate amount of administration relative to the sums of money involved.
HMRC accepted this viewpoint and has issued revised guidance so that the discount can be covered in just one invoice.
HMRC has created a template invoice to show the changes you need to make. You can see that sample invoice here.
Essentially, your prompt payment discount invoice should now include:
You will need to keep bank statements so you can show as evidence the reduced amount of VAT paid by customers that do take up the prompt payment discount.
Credit notes are still an option if you would prefer to use this route.
If you take advantage of prompt payment discounts, you must record both the amount of VAT paid and the date paid. This will mean you need both the invoice details and the bank statement to show where you have accepted prompt payment terms.
Although the rules are simpler than when they were first mooted, there is considerable scope for error on VAT returns.