www.gov.uk/government/publications/revenue-and-customs-brief-49-2014-vat-prompt-payment-discounts
Published 22 December 2014
Contents
1. Introduction
2. Who needs to read this?
3. Background
4. The New Legislation
5. Guidance
Appendix A - example Prompt Payment Discounts invoice
1. Introduction
PPD VAT legislation was amended earlier this year. This brief
provides guidance on what to do when you raise or receive a VAT
invoice offering a PPD from 1 April 2015 when the change takes
effect.
2. Who needs to read this?
Suppliers who offer and customers who receive PPD where an invoice
is issued.
3. Background
A 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.
- at present, suppliers making PPD offers are 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 may only recover
as input tax the VAT stated on the invoice.
- after the change, 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.
Changes were made to UK legislation in the Finance Act 2014 in
order to protect the revenue, and put it beyond doubt that UK
legislation is aligned with EU legislation. The new legislation is at
paragraph 4 below.
The change took effect on 1 May 2014 for supplies of broadcasting
and telecommunication services where there was no obligation to
provide a VAT invoice. For all other supplies the change takes effect
on 1 April 2015.
A consultation took place between 17 June and 9 September 2014
asking businesses for their views and suggestions on how the changes
should be implemented. In particular whether issuing credit or debit
notes to evidence a change in the consideration would cause them
difficulties. The Summary of Consultation Responses was published
shortly after Autumn Statement 2014. We accepted that an alternative
to issuing credit or debit notes was needed (see guidance below).
4. The New Legislation
The revised paragraph 4, Schedule 6, VATA 1994 is set out
below:
4 (1) Sub-paragraph (2) applies where. (a) goods or services are
supplied for a consideration which is a price in money, (b) the terms
on which those goods or services are so supplied allow a discount for
prompt payment of that price, (c) payment of that price is not made
by instalments, and (d) payment of that price is made in accordance
with those terms so that the discount is realised in relation to that
payment. (2) For the purposes of section 19 (value of supply of goods
or services) the consideration is the discounted price paid.
5. Guidance
Suppliers:
a) on issuing a VAT invoice, suppliers will enter the invoice into
their accounts, and record the VAT on the full price. If offering a
PPD suppliers must show the rate of the discount offered on their
invoice (Regulation 14 of the VAT Regulations 1995 (SI
1995/2518)).
b) the supplier will not know if the discount has been taken-up
until they are paid in accordance with the terms of the PPD offer, or
the time limit for the PPD expires.
c) the supplier will need to decide, before they issue an invoice,
which of the processes below they will adopt to adjust their accounts
in order to record a reduction in consideration if a discount is
taken-up.
d) when adjustments take place in a VAT accounting period
subsequent to the period in which the supply took place the method of
adjustment needs to comply with Regulation 38 of the VAT Regulations
1995 (SI 1995/2518).
e) suppliers may issue a credit note to evidence the reduction in
consideration. In which case, a copy of the credit note must be
retained as proof of that reduction.
f) alternatively, if they do not wish to issue a credit note, the
invoice must contain the following information (in addition to the
normal invoicing requirements):
- the terms of the PPD (PPD terms must include, but need not be
limited to, the time by which the discounted price must be
made).
- a statement that the customer can only recover as input tax the
VAT paid to the supplier.
Additionally, it might be helpful for invoices to show:
- the discounted price
- the VAT on the discounted price
- the total amount due if the PPD is taken up.
g) if a business has adopted the option at (f), the VAT invoice,
containing appropriate wording as described above, together with
proof of receipt of the discounted price in accordance with the terms
of the PPD offer (e.g. a bank statement) will be required to evidence
the reduction in consideration, and the reduction to the
supplier’s output tax (in accordance with Regulation 38 of the
VAT Regulations 1995).
h) we recommend businesses use the following wording on the
invoice:
“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.”
i) if the discounted price is paid in accordance with the PPD
terms, then the supplier must adjust their records to record the
output tax on the amount actually received.
If the full amount is received no adjustment will be
necessary.
Customers:
On receiving an invoice offering a PPD a VAT registered customer
may recover the VAT charged, in accordance with VAT Regulation 29 of
the VAT Regulations 1995.
As adjustments may take place in a VAT accounting period
subsequent to the period in which the supply took place the method of
adjustment needs to comply with Regulation 38 of the VAT Regulations
1995 (SI 1995/2518).
In practice this will mean:
a) if the customer pays the full price they record it in their
records and no VAT adjustment is necessary.
b) if the customer pays the discounted price in accordance with
the PPD terms on receipt of the invoice they may record the
discounted price and VAT on this in their accounts and no subsequent
VAT adjustment is necessary.
c) if the customer does not pay when the invoice is first issued,
they must record the full price and VAT in their records as shown on
the invoice. If they subsequently decide to take-up the PPD then:
- if they have received an invoice setting out the PPD terms
which states no credit note will be issued they must adjust the VAT
in their records when payment is made. They should retain a
document that shows the date and amount of payment (e.g. a bank
statement) in addition to the invoice to evidence the reduction in
consideration.
- if the supplier’s invoice does not state that a credit
note will not be issued, the customer must adjust the VAT they
claim as input tax when the credit note is received. They must
retain the credit note as proof of the reduction in
consideration.
Imports
The legislation in relation to prompt payments on imports has not
changed; section 21(3) of VATA 1994 still applies.
Payments outside PPD terms
Where a supplier receives a payment that falls short of the full
price but which is not made in accordance with the PPD terms it
cannot be treated as a PPD. The supplier must account for VAT on the
full amount as stated on the invoice. If the amount not paid remains
uncollected it will become a bad debt in the normal way. If a price
adjustment is agreed later, then adjustment must be made in the
normal way e.g. a credit note.
Appendix A - example Prompt Payment Discounts
invoice
Date issued 22 December 2014.