VAT and Prompt Payment Discounts (PPD)

February 27, 2015 10:30 am Published by

Last year, it was announced that the VAT rules for dealing with “Prompt Payment Discounts” (PPD) would be changing from 1 April 2015.

HMRC have now issued a brief setting out guidance for businesses affected by the change… and many will need to implement changes in their invoicing procedures.

Basically, from 1st April 2015, output VAT will need to be calculated on the consideration actually received from the customer, instead of the current rules where VAT is calculated on the value of the supply, net of any discount for prompt payment.

So let’s assume, for example, that you supply goods to the value of £1000 but allow the customer a 5% discount if they pay within 14 days. Under the current rules VAT is charged on the discounted price of £950 not £1000, whether or not the customer pays the discounted timeframe.

But now from 1st April 2015, when you issue a VAT invoice into your accounts you record the VAT on the full price.

If you offer a PPD, you must show the rate of the discount offered on their invoice. You will not know if the discount has been taken up until you are paid in accordance with the terms of the PPD offer, or the time limit for the PPD expires.

You will then have two options to deal with the discount:

1. You could issue a credit note to evidence the reduction
2. You could adjust the output tax in your VAT return, and the invoice must contain the terms of the PPD (in particular the time by which the discounted price must be made), and a statement that the customer can only recover as input tax the VAT paid to the supplier.

If you need any clarification on this – as it could be quite complex depending on how you operate – get in touch on 01708 250748

This post was written by M3evolve