Prompt Payment Discount - changing rules

February 15th, 2015

HMRC are changing the rules on Prompt Payment Discount this coming April. If you think this might affect you, read our handy guide below. ** What is Prompt Payment Discount (PPD)?** PPD is more commonly referred to as settlement discount. 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 (e.g. pay within 14 days and you’ll get a 5% discount).

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What exactly is changing regarding PPD? Currently in the UK, where PPD is offered any associated VAT amount is always calculated based on the discounted price, and that’s even if the customer doesn’t pay promptly enough to receive the discount. Therefore where PPD is offered the supplier always charges the customer a reduced amount of VAT (with that reduced amount being shown on the invoice). This means that where PPD is not taken up by the customer then HMRC does not receive the full VAT amount that’s really due.HMRC are changing the rules regarding the treatment of the VAT where PPD is offered. From 1 April 2015, suppliers must account for VAT on the payment amount they actually receive from their customer; customers may then recover the VAT that is actually paid to the supplier.This means that where PPD is offered on or after 1 April 2015 the supplier will now always show the full amount of VAT on the invoice. Where a customer does not pay promptly enough to receive the discount, the customer will now instead pay VAT on the full price of the goods/services (i.e. the customer will pay the full VAT amount as shown on the invoice).Where the customer pays promptly then they will still (as now) pay VAT on the discounted price (i.e. the customer will pay a reduced VAT amount based on the PPD that applies). How will the change to PPD affect businesses? The change to PPD affects both suppliers who offer PPD and customers who receive PPD. Business who receive PPD: If the offer of PPD is not taken up (i.e. the invoice is not paid within the specified period of time) then the business doesn’t need to do anything more regarding the accounting of VAT; this means if the VAT is to be reclaimed then the business will simply reclaim (as input tax) the amount of VAT on the original invoice i.e. the (full) undiscounted amount of VAT.However if the offer of PPD is taken up then the business must only reclaim VAT that’s applicable to the discounted price actually paid (the business cannot reclaim the full amount of VAT on the original invoice); this means the business must reduce the VAT amount being claimed accordingly. Furthermore, the value recorded in Box 7 of the VAT Return (Total value of purchases …) must now show the goods value applicable to the discounted price actually paid. Business who offer PPD: Where that offer of PPD is not taken up by the customer then the business doesn’t need to do anything more regarding the accounting of VAT; this means the VAT to be recorded as output tax will simply be the amount of VAT on the original invoice i.e. the (full) undiscounted amount of VAT.However if the offer of PPD is taken up by the customer then the business must only record (as output tax) the VAT applicable to the discounted price actually paid; this means the business must reduce the VAT output tax amount accordingly. Furthermore, the value recorded in Box 6 of the VAT Return (Total value of sales…) must now show the goods value applicable to the discounted price actually paid. Back to Blog posts