As of 1st April 2015, new VAT rules for customer discounts are being introduced – if you offer customer discounts make sure you know how these changes will affect your business.
Invoicing and chasing payment is one of many essential jobs to ensure a business can keep going with good cash flow. For this reason some businesses offer incentives such as prompt payment discounts to their customers.
Currently if you offer a prompt payment discount, the VAT on the bill is charged according to the discounted amount, not the original value of the service or product.
For example – a supplier provides a customer with an invoice of £1000 for goods. If the customer pays within 14 days they will receive a 10% discount reducing the bill to £900. VAT will only be charged on £900.
Whilst a useful option for many businesses to encourage payment, some industries and businesses have been known to use the discount for tax avoidance purposes.
Typically companies provide huge discounts to customers that won’t claim the tax back and then only pay the tax on the discounted rate, something the Government is trying to avoid with the new changes.
If you use prompt payment discounts for your business, we would recommend the following tips to manage the changes following 1st April 2015:
If you don’t want to issue a credit note, you still need to show the full VAT on the invoice and also make sure that your invoices contain the following information;
a. The terms of the PPD;
b. A statement that ‘the customer can only recover as input tax the VAT paid to the supplier’;
- If you issue an invoice charging the full amount for goods and services and the customer qualifies for prompt payment discount, you will need to issue a credit note for the applicable discount.
If you are unsure of how the new changes to prompt payment discounts affect you, the team at Harvey Telford and Bates Chartered Accountants are on hand to answer all your questions, and assist with your accounting requirements.