Out-Law News | 19 Jun 2014 | 10:48 am | 2 min. read
At present, businesses that offer PPDs to their customers can issue invoices that give details of the amount of that discount and show the VAT due calculated on the discounted price. HMRC has not required businesses to alter the amount of VAT invoices and accounted for if that discount is not taken up. However, from 1 April 2015, businesses will be required to account for VAT on the consideration that they actually receive for the goods or services supplied.
VAT and indirect taxes expert Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com, said that although the changes were "innocuous enough", they could create problems for the invoicing and finance departments of some businesses.
"In particular, the likely requirement to issue greater numbers of credit notes and make adjustments to the VAT account may well, in itself, lead to increased compliance errors," he said. "Business would be well advised to ensure that the processes and procedure put in place to deal with these changes are established and tested prior to 1 April 2015."
"The historic UK treatment was undoubtedly viewed as something of a business facilitation concession by HMRC. The received wisdom had been that these PPDs were largely employed in the B2B environment and, given the input tax recovery position of most businesses, it is unlikely that there was a great deal of tax lost to HMRC as a result of the operation of this interpretation of the law. It would appear that HMRC has noted increasing use of such discounts in the B2B environment and is no longer prepared to accept the loss to the public revenue which arises," he said.
The change will apply to all supplies of goods and services made on or after 1 April 2015; other than supplies of telecommunication and broadcasting services to consumers, where the change came into force on 1 May 2014. It is intended to bring the UK legislation into line with the EU's Principal VAT Directive, which requires that VAT be paid on the actual consideration received.
Once the change is in force, firms would only be able to show the discounted price paid on a VAT invoice if that price is paid in accordance with the terms of the contract for supply before the invoice is issued. Otherwise, the invoice would have to show the undiscounted amount plus VAT, and the rate of discount offered.
According to the consultation, if the PPD is taken up after the invoice is issued the supplier must adjust the VAT charged and accounted for to reflect the consideration actually received. It should do this by issuing a credit note or revised invoice, and making the necessary adjustments to their accounting records. If the full price is paid then VAT will already be accounted for on the undiscounted price. The consultation also sets out how VAT should be accounted for in cases where a VAT invoice is not required.
The time businesses must account for VAT will not change once the new regime in force. Businesses will still have to account for VAT in the accounting period in which the supply of goods or services is made; or in the period the payment is received for those businesses in the cash accounting scheme.