On 17 June 2014, HMRC launched a consultation on implementing provisions contained in the Finance Bill 2014, on prompt payment discounts (PPDs).
To date, HMRC has allowed suppliers to account for VAT on the discounted price even if that discount is not taken up. After the change, businesses must account for VAT on the consideration they actually receive.
The change was implemented, with effect from 1 May 2014, for supplies of telecommunication and broadcasting services where there is no obligation to provide a VAT invoice. The change will otherwise effect supplies made on or after 1 April 2015.
HMRC is seeking suggestions on how the businesses affected should make consequent accounting adjustments, so as to inform any guidance HMRC may issue.
Under the new system:
In circumstances where a VAT invoice is required and the terms allow for a PPD:
- the invoice should show the discounted price if paid before issue; or
- the full price and the discount offered if not paid before issue. In such a case, if the PPD is taken up, the supplier must issue a credit note or adjusted invoice and adjust its records, and the customer must amend its records and only claim the VAT actually charged.
In circumstances where a VAT invoice is not required, but the terms on which the goods or services are offered allow for a PPD:
- if payment is not made before the time of supply the supplier should account for VAT on the undiscounted price;
- if the discounted payment is received before, or at the time of supply, VAT must be accounted for on the discounted price paid;
- if the full price is paid VAT must be accounted for on the undiscounted price; or
- if the discounted price is paid after the time of supply but in accordance with the terms of the supply (allowing for the PPD) then VAT must be accounted for on the discounted price paid. Because VAT will have already been accounted for on the full price there will therefore need to be an adjustment.
The Government estimates that the change will affect up to 250,000 businesses, or 13% of the VAT-registered population of 1.9m businesses, with one off costs of £8m and ongoing costs of around £3.5m per annum from 2015/16.
Comments are sought by 9 September 2014.
For the consultation documents click here