Businesses which currently offer prompt payment discounts (PPD) to their customer need to be aware that there are some changes ahead to the rules.
Currently under the UK law VAT is payable on the net amount after deducting the discount, whether or not the customer takes advantage of the PPD and pays promptly.
For Example if you sell some goods for £1000 plus VAT and offer 5% discount if the customer pays within 10 days then VAT is charged at 20% on £950 being £190, rather than 20% of £1,000 which is £200. Even if the customer takes 30 days to pay and therefore does not qualify for the PPD, the amount due will be £1,190.00.
This rule regarding PPD is in the process of being changed and from 1 April 2015 VAT will be 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 buisness 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 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.
If your business currently offers PPD you may need to change your invoicing procedures from April 1 2015 and the government are going to consult on the implementation of the change. We will you keep informed of the details of the changes and when further detailed guidance is made available.
To read the official notes by HMRC please click here