VAT and early payment discounts

From 1st April 2015 the process for dealing with the VAT on invoices where an early payment discount is offered (known as a Prompt Payment Discount or PPD) will change.

Now the supplier should show the VAT calculation on the basis that the customer takes advantage of the PPD and pays the reduced price. Both the supplier and the customer account for VAT on the reduced amount.

The change from 1st April 2015 means that both the supplier and the customer must account for VAT on the full price, before any PPD is taken. The supplier has the option either to raise a credit note for the price difference if the customer complies with the conditions of the PPD and pays the lower amount, or to write a specific text on the invoice setting out the precise terms of the PPD offer, and what obligations the customer has to account for the VAT actually paid.

In all cases, both the supplier and customer must ensure that they account for the actual amount of VAT paid and received.

Is this complicated? Yes.

The solution – do not offer PPD. Experience tells us that in most cases the customer will pay late and still deduct the Prompt Payment Discount if it is offered, which just makes more work.

EBS will be happy to offer advice.