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.