Changes to the VAT treatment of prompt payment discounts for all supplies of goods and services came into effect from 1 April 2015.
A Prompt Payment Discount (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.
Prior to 1 April 2015 suppliers making PPD offers were 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 were able to recover as input tax the VAT stated on the invoice.
After 1 April 2015 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.
These changes will mean an increase in the VAT due on supplies of goods and services where a prompt payment discount is offered but not taken up. Customers that have restricted VAT recovery such as private and non-business customers and partially exempt businesses will suffer additional VAT costs as a result of this change.
Accounting treatment On issuing a VAT invoice a business will have to record the VAT on the full price in their accounts. If offering a PPD suppliers must show the rate of the discount offered on their invoice.
If the PPD is taken up then the supplier will have to make an adjustment in their accounts to reflect the reduced consideration. In addition the supplier will have to decide which method they wish to use to inform their customer that PPD has been validly claimed and the reduced VAT payment accepted.
This can be done by issuing a credit note to evidence the reduction in consideration or an approved statement on the original invoice.
An example of this would be: ‘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.’
The legislation in relation to prompt payments on imports has not changed.