Changes to the VAT treatment of prompt payment discounts (PPDs) for all supplies of goods and services come into effect from 1 April 2015. (A PPD is an offer by a supplier to their customer of a reduction in the price of goods or services supplied if the customer pays within a certain timescale – e.g. 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.)
The current VAT rules allow businesses offering prompt payment discounts to account for VAT on the discounted price, regardless of whether the discount is taken up by the customer. From 1 April, the rules will be amended to bring them in line with EU law, so that VAT will be due on the payment actually received.
These changes will mean an increase in the VAT due on supplies of goods and services where a prompt payment discount is offered but not taken up. Customers that have restricted VAT recovery such as private and non-business customers and partially exempt businesses will suffer additional VAT costs as a result of this change.
If you are a supplier and offer prompt payment discounts, you will need to ensure that your billing and VAT accounting systems are updated to reflect the new rules.
To find out more, see the recently issued HMRC brief.
For further advice on this or any other VAT issue, please contact James or Terry.