From 1st April, The VAT treatment of prompt payment discounts will change. Suppliers will need to provide additional information on their invoices, and customers will have to make sure they reclaim the correct amount of VAT.
A typical discount would be if a supplier offered a 5% reduction for payment within 14 days. Under current rules, the supplier only has to put on the invoice, and account for, the VAT due on the discounted price – even if the full price is paid. The customer can only recover the VAT stated on the invoice, even if they paid the full price.
The government felt that this created a loophole that allowed some businesses to obtain a VAT advantage. So from 1 April, suppliers must account for VAT on the amount they actually receive, and customers should recover the amount of VAT that is actually paid to the supplier.
The rule change makes it likely that VAT-registered businesses will accidentally underpay or over-claim their VAT, which makes them an easy target for HMRC to focus on during a visit. The penalty for failing to apply the new rules can be as much as 30% of the VAT due. However, this can rise to 100% if HMRC thinks there was deliberate intent to avoid tax.
Suppliers offering discounts for prompt payment need to change their accounts system so that their sales invoices show the correct details from 1st April and review their internal control procedures.
Alternatively, suppliers could record the full price on their system and then issue a credit note for the discount including VAT if full payment is received early, but this involves extra administration and compliance.
A more practical solution is to include additional information on the invoice. It should state the terms of the prompt payment discount and notify the customer that they can only recover the VAT paid to the supplier as input tax in line with the discount terms
To help the customer, suppliers may also want to show the
- Discounted price
- VAT on the discounted price
- Total amount due if prompt payment is made.
Suppliers will also have to provide a cross reference to banking records to ensure that the correct VAT amount has been declared.
Customers also have certain duties. When processing purchase invoices, they will have to review any prompt payment discounts to ensure that only the lower amount of VAT is recovered where the prompt payment is taken up. They will also need to update the internal controls for accounts payable staff depending on the likelihood of the invoice being paid on time.