Prompt payment discount invoice changes

HMRC has issued Revenue and Customs Brief 49 (2014): VAT Prompt Payment Discounts which explains how the revisions to paragraph 4, schedule 6 VATA 1994 will work from April 2015.

The paragraph states:

4 (1) Sub-paragraph (2) applies where:

(a) goods or services are supplied for a consideration which is a price in money,

(b) the terms on which those goods or services are so supplied allow a discount for prompt payment of that price,

(c) payment of that price is not made by instalments, and

(d) payment of that price is made in accordance with those terms so that the discount is realised in relation to that payment. (2) For the purposes of section 19 (value of supply of goods or services) the consideration is the discounted price paid.

Prior to this change, VAT was calculated on the payment discounted price, regardless of whether the discount was used.  

From April 2015, suppliers must account for the amount they receive and customers the amount they have paid. Suppliers have two choices and will need to make the decision before any invoice is issued which of the processes they will adopt.

The options are to:

1. issue a credit note to evidence the reduction in consideration – in this case a copy of the credit note must be retained as proof of that reduction; or
2. if they do not wish to issue a credit note, the invoice must contain the following information (in addition to the normal invoicing requirements):

• the terms of the prompt payment discount. Terms must include, but need not be limited to, 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.

HMRC has produced a pro-forma invoice and recommends that the following wording be included on invoices where the second alternative is selected:

'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.'

These changes were made to broadcasting and telecommunications effective from 1 May 2014 and bring UK legislation in line with the EU Directive.