HM Revenue & Customs (HMRC) have made changes to the UK law on prompt payment discounts (PPD) to ensure that UK law is aligned with EU legislation. A PPD is a discounted percentage a supplier may offer to a customer if they pay their invoice within a certain time period.
HMRC have started to detect an increasing use of PPDs in transactions with consumers, this gives rises to a VAT loss if the PPD is not taken up within the agreed time period. Before the change, where goods and services are supplied allowing a discount for a prompt payment, the VAT was calculated based on the net price after the discount was taken, regardless as to whether or not the payment is made in accordance with the discount terms.
This procedure made it much simpler to issue a VAT invoice with a known, fixed amount of VAT on it and as PPDs are mainly used in business-to-business transactions, any VAT loss would be small.
With effect from April 2015 the rules have changed and traders who offer discounts must show the full undiscounted price on their original invoice, and will initially account for output tax on the full price, not the discounted price. The output tax will then be adjusted if the customer takes up the discount within the agreed time. The trader will either have to issue a credit note if the customer takes up the discount and pays the reduced amount; or the original invoice can set out both the full and discounted prices and VAT details on each basis.
If you are confused about the new changes to PPD call one of our VAT experts on 01228 711888 who will talk you through the change and help you with any questions or concerns you may have.