If you issue sales invoices to your customers and offer a prompt payment discount (PPD), there is a change in how VAT is administered which will affect you. It will also affect you if you receive invoices which give a PPD.
The Current Situation
As the law currently stands, if you provide a PPD, then you calculate the VAT on the discounted amount. So if you prepare an invoice for £1,000 and offer a PPD of 5% for payment within 30 days, the amount of VAT charged would be £190 (20% of £950), not VAT on £1,000 (i.e. £200).
The Position from 1 April 2015
When the change comes in from 1 April 2015, the supplier must account for VAT on the amount actually paid. This will mean that the invoice issued will look like a normal invoice. If the PPD is not taken, then no action is required. However, if a PPD is taken, then either the original invoice must be reissued, or a credit note for the difference should be issued.
Alternatively, HMRC provide guidance on what is acceptable wording on an invoice, which covers both scenarios (i.e. PPD taken or PPD not taken). See here for more details.
If you need any help with implementing these changes or identifying how they affect you, please do not hesitate to get in touch.
