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Updates from the Clayton & Brewill team.

VAT on prompt payment discounts

11th May, 2015

Do you offer a discount for prompt payment of invoices? Do you pay invoices early in order to get an agreed reduction in the price?

If so, you need to be aware of HMRC's recent changes to how VAT should be charged. Clayton & Brewill's Doug Perry explains.

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.

The old VAT prompt payment discount rules

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.

The new VAT prompt payment discount rules…

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.

New format for prompt payment invoices

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:

  • The terms of the prompt payment discount (ie: payment within 14 days)
  • The discounted price
  • The VAT on the discounted price
  • The total amount if the prompt payment discount is taken up
  • A statement telling the customer they can only recover the actual VAT paid

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.

And for buyers of goods?

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.

Need help with your VAT return?

Although the rules are simpler than when they were first mooted, there is considerable scope for error on VAT returns.

For help or advice with your quarterly VAT returns, please contact one of Clayton & Brewill’s VAT specialists by email or call the office on 0115 950 3044.

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