VATVAL08500 - Special valuation provisions: prompt payment discounts - Paragraph 4, Schedule 6, VATA 1994

Introduction

A PPD is an offer by a supplier to their customer of a reduction in the price of goods and/or services supplied if the customer pays promptly; that is, after an invoice has been issued and before full payment is due. For example a business may offer a discount of 5% of the full price if payment is made within 14 days of the date of the invoice.

Before 1 May 2014 HMRC allowed all businesses to account for output tax on the reduced amount offered to their customers even when customers paid the undiscounted amount. This only applied if the terms offered did not allow payment by instalments.

The rules were changed for broadcasting and telecommunications businesses where there was no obligation to provide a VAT invoice with effect from 1 May 2014 and for all other businesses from the 1 April 2015. The change ensured UK policy and practice aligned with EU law.

The tax value is now calculated by reference to the amount paid. Suppliers must account for VAT on the amount actually paid for the supply and customers may only recover the amount of VAT that is actually paid for the supply.

Legislation

The UK VAT legislation on prompt payment discounts is VATA 1994, Schedule 6, paragraph 4.

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.

4 (2) For the purposes of section 19 (value of supply of goods or services) the consideration is the discounted price paid.

Suppliers

Supplier will need to decide, before they issue an invoice, which of the 2 processes below they will adopt to adjust their accounts in order to record a reduction in consideration if a discount is taken-up:

1 - Issue a VAT invoice for the full value of the supply plus VAT and include the offer of a discount for prompt payment showing the rate of the discount offered (Regulation 14 of the VAT Regulations 1995 (SI 1995/2518)).

The supplier will not know if the discount has been taken up until they are paid in accordance with the terms of the PPD offer, or the time limit for the PPD expires.

If the discount is taken up, a credit note (or equivalent) must be issued to evidence the reduction in consideration. A copy of the credit note must be retained as proof of the reduction.

2 - Issue an invoice containing the following information (in addition to the normal invoicing requirements):

  • the terms of the PPD (PPD terms must include, but need not be limited to, the time by which the discounted price must be made).
  • a statement that the customer can only recover as input tax the VAT paid to the supplier.

Additionally, a supplier may choose to show:

  • the discounted price
  • the VAT on the discounted price
  • the total amount due if the PPD is taken up.

We recommend businesses use the following wording on the invoice:

‘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.’

If a business adopts option 2, the VAT invoice and proof of receipt of the discounted price in accordance with the terms of the PPD offer (e.g. a bank statement) are required to evidence the reduction in consideration, and the reduction to the supplier’s output tax (in accordance with Regulation 38 of the VAT Regulations 1995).

Customers:

On receiving an invoice offering a PPD a VAT registered customer may recover the VAT charged, in accordance with VAT Regulation 29 of the VAT Regulations 1995.

As adjustments may take place in a VAT accounting period subsequent to the period in which the supply took place the method of adjustment needs to comply with Regulation 38 of the VAT Regulations 1995 (SI 1995/2518).

In practice this will mean:

a) if the customer pays the full price, they record it in their records and no VAT adjustment is necessary.

b) if the customer pays the discounted price in accordance with the PPD terms on receipt of the invoice they may record the discounted price and VAT on this in their accounts and no subsequent VAT adjustment is necessary.

c) if the customer does not pay when the invoice is first issued, they must record the full price and VAT in their records as shown on the invoice. If they subsequently decide to take-up the PPD then:

  • if they have received an invoice setting out the PPD terms which states no credit note will be issued they must adjust the VAT in their records when payment is made. They should retain a document that shows the date and amount of payment (e.g. a bank statement) in addition to the invoice to evidence the reduction in consideration.
  • if the supplier’s invoice does not state that ‘a credit note will not be issued’, the customer must adjust the VAT they claim as input tax when the credit note is received. They must retain the credit note as proof of the reduction in consideration.

Adjustments in price outside prompt payment terms

Where a supplier receives a payment that falls short of the full price but which is not made in accordance with the PPD terms it cannot be treated as a PPD. The supplier must account for VAT on the full amount as stated on the invoice. If the amount not paid remains uncollected it will become a bad debt in the normal way. If a price adjustment is agreed later, then adjustment must be made in the normal way in accordance with VAT regulation 38 e.g. a credit note.