Drummond Laurie Chartered AccountantsThe current position is that where a supplier offers a prompt payment discount (‘PPD’), they are allowed to account for VAT on the discounted price even if the discount is never taken up.  From 1st April 2015, VAT will be payable on the consideration actually paid. This is to protect the loss of revenue under the current rules and ensure compliance with EU law. However it is going to increase the administrative burden for both suppliers and customers.

For suppliers, they will have to now account for VAT on the full price at the time of issuing the invoice.  If offering a PPD the rate of discount offered must be shown on the invoice.  The supplier must decide at the time the invoice is raised which method of accounting to adopt if the PPD is taken up.  The first option is to raise a credit note to reflect the reduction in consideration. 

Alternatively if the supplier does not want to be burdened with raising credit notes, a statement can be made on the invoice that no credit note will be issued.  In this case the invoice needs to state i) the terms of the PPD (including the time by which the discounted price must be paid) and ii) a statement that the customer can only recover as input tax the amount of VAT actually paid to the supplier.  Ideally the invoice should set out the discounted price, the VAT on the discounted price and the total amount payable if PPD terms are taken up.  Only once the supplier knows that the customer has paid under the PPD terms should they adjust the VAT account to credit the amount of VAT payable.

The key issue as a customer will be to ensure that VAT is only recovered with reference to the consideration actually paid to the supplier.  If as customer you receive the invoice and decide to pay it immediately to benefit from the PPD, then VAT should be accounted for on the discounted amount and no future adjustment should be required in the accounts.  However if on receipt of the invoice the customer does not yet know if they will be able to pay within the terms of the PPD offered,  VAT will require to be accounted for on the full amount invoiced at the outset.

The customer should then make an adjustment if the discounted terms are taken up.  The adjustment should be made at the time the payment is being made (if the invoice states that no credit note will be issued) or when the credit note is received.  Where the invoice tax point and the taking up of the discount or receipt of a credit note straddle an accounting period, this will mean that the full VAT is accounted for in one period and the credit will not be received until the later period.  It will therefore be worth trying to be in a position where the invoice and the discounted payment fall in the same quarter.

Please note that the new legislation applies to PPD only and does not affect the position for contingent discounts.

For more information on this and other Drummond Laurie services please contact David Wheeler on 01324 441252 or email david.wheeler@drummondlaurie.co.uk