New VAT rules for prompt payment discounts from April 2015
If you offer prompt payment discounts to your customers, or receive them from your suppliers, you need to be aware of new rules which come into effect from April 2015.
It has been HMRC policy for many years that where a supplier offers a prompt payment discount to its customers it can calculate the VAT on the discounted amount, regardless of whether the customer takes up the offer and pays within the time allowed. This means that the supplier accounts for VAT on the discounted amount and the customer claims the VAT shown on the invoice.
Following a review HMRC decided that this policy could no longer be allowed and so the rules are changing from April 2015.
What are the new rules?
Under the new rules the supplier has to account for VAT based on the amount actually paid by the customer, and the customer can only reclaim VAT based on the amount they pay to the supplier.
The supplier will now have two options:
- It should issue its invoices showing VAT on the full amount. If a prompt payment discount is offered the rate should be shown. If the customer takes up the discount the supplier should issue a credit note for the discount and VAT.
- It should issue its invoices showing VAT on the full amount, but also include additional information regarding the discount. In this case no credit note will be required.
HMRC recommends that if the supplier chooses option 2 above it should use the following wording on its invoices:
“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.”
HMRC also recommends that the supplier shows the discounted price, the VAT on the discounted price and the total due on the invoice.
What do I need to do?
- If you offer prompt payment discounts to your customers you need to check the new rules and decide which option you will use from April 2015.
- If you receive invoices from suppliers who offer prompt payment discounts you must ensure you claim the correct amount of VAT, and deal correctly with any credit notes issued by those suppliers.
Full details of the new rules and an example invoice for option 2, click here to view.
If you have any concerns about the issues covered above please contact your usual Liaison adviser or our dedicated NHS Helpline on 0845 603 9000.
Every effort has been made to ensure the accuracy of this information. However, it may not cover your particular situation and recipients should not act upon it without first seeking professional advice.