Do you offer prompt payment discounts to clients? VAT changes from April 2015

From 1 April 2015, VAT must be charged on the value of the supply without the inclusion of the prompt payment discount and the VAT adjusted if and when the discount is taken up.

Previously, under UK law, VAT was payable on the net amount after deducting the discount, whether or not the customer took advantage of the PPD and paid promptly.

From 1 April 2015 VAT is due on the amount the customer actually pays. So using the above example if the customer fails to take advantage of the PPD he would need to pay the full £1,000 plus VAT of £200.

The business making the supply will have to issue a credit note to account for the PPD where this is taken up. So using the same example if the customer takes up the discount then the credit note would be for £50 plus £10 VAT.

Apparently PPD have been widely used by suppliers of telecommunications and broadcasting services and so the use of PPD to reduce VAT due has already been blocked in those sectors from 1 May 2014. This applies where the customer cannot recover the VAT charged.

What should you do?

If your business currently offers PPD you may need to change your invoicing procedures from 1 April 2015.

• Those offering discounts need to amend their invoicing templates and potentially accounting systems to ensure the correct VAT amount is charged to their customers and reported to HMRC.
• You should also inform your customers of the changes
• Those receiving prompt payments will need to ensure they record the VAT they can recover correctly