New legislation is due to take effect on 1 April 2015 which affects prompt payment discounts.
UK law currently allows businesses who offer such discounts to account for VAT on the discounted value irrespective of whether the customer takes advantage of the discount. This has the effect of reducing the 'taxable' amount and where the customer does not take up the discount there is a VAT loss to the Exchequer.
Under the new legislation the supplier is required to charge and account for VAT on the amount actually received.
In order to comply with the new legislation the original invoice must contain the full net price and VAT amounts and the supplier must implement one of two new procedures to record a reduction in the amounts received if the discount is subsequently taken up.
The supplier may either:
Issue a credit note to evidence the reduction in the amounts received or include further details on the original invoice which comprise the terms of the discount and a statement that the customer can only recover as input tax the VAT paid to the supplier.
Businesses that offer prompt payment discounts will need to implement changes to their procedures and processes to ensure they comply with the new requirements.
Businesses that take up prompt payment discounts from their suppliers will also need to implement changes to their procedures and processes to ensure they recover the correct amount of VAT.