On 1 April 2015, HMRC are introducing new VAT legislation on prompt payment discounts (PPD) to align the UK legislation with EU legislation.
HMRC have identified that there was a blackhole in the VAT system that resulted in revenue not being collected by the Government where discounts were offered and not taken up. The current rules allow for businesses to pay VAT back to the Government at the discounted rate regardless of whether the discount is taken up or not. Therefore, if all customers used the PPD term, there would not be an issue, but the rules allow for the business to make a profit on the transactions where the full amount is paid. This issue has got out of hand in more recent years where these discounts now being offered to consumers and less VAT is being paid to HMRC.
To overcome this the rules are changing. From 1 April 2015, VAT is to be paid on the full consideration actually received. The paperwork requirements are also changing with all prompt payment discounts being disclosed either on the full value invoice with a disclosure note about what the VAT is to be reclaimed by the customer should the PPD be accepted, or in the form of a credit note to be issued to the customer on receipt of discounted payment.
Both of these require more administration and for small businesses the impact of this additional administrative burden is bigger than the large companies that may have dedicated systems or finance teams to overcome these rules. The simplest approach is to adopt the issuing of a credit note. This means the template of the invoice does not have to be amended and does not require PPD VAT disclosures to be made on the invoice. A credit note is simply a negative invoice. These can be raised in your accounting solution in the invoice section with all values being entered as a negative value. The credit note can then be issued in the same way as the invoice.
If your accounting solution does not have this functionality, please get in touch and we can introduce you to a better way of managing the finances in your small business.
In summary, there is a change coming that will result in a HMRC blackhole being closed. Some businesses will see a financial impact as they can no longer profit from discounts not being taken from a VAT perspective. More of us will be impacted by the fact that we must ensure the correct records are kept in the event of a VAT audit.
HMRC have identified that there was a blackhole in the VAT system that resulted in revenue not being collected by the Government where discounts were offered and not taken up. The current rules allow for businesses to pay VAT back to the Government at the discounted rate regardless of whether the discount is taken up or not. Therefore, if all customers used the PPD term, there would not be an issue, but the rules allow for the business to make a profit on the transactions where the full amount is paid. This issue has got out of hand in more recent years where these discounts now being offered to consumers and less VAT is being paid to HMRC.
To overcome this the rules are changing. From 1 April 2015, VAT is to be paid on the full consideration actually received. The paperwork requirements are also changing with all prompt payment discounts being disclosed either on the full value invoice with a disclosure note about what the VAT is to be reclaimed by the customer should the PPD be accepted, or in the form of a credit note to be issued to the customer on receipt of discounted payment.
Both of these require more administration and for small businesses the impact of this additional administrative burden is bigger than the large companies that may have dedicated systems or finance teams to overcome these rules. The simplest approach is to adopt the issuing of a credit note. This means the template of the invoice does not have to be amended and does not require PPD VAT disclosures to be made on the invoice. A credit note is simply a negative invoice. These can be raised in your accounting solution in the invoice section with all values being entered as a negative value. The credit note can then be issued in the same way as the invoice.
If your accounting solution does not have this functionality, please get in touch and we can introduce you to a better way of managing the finances in your small business.
In summary, there is a change coming that will result in a HMRC blackhole being closed. Some businesses will see a financial impact as they can no longer profit from discounts not being taken from a VAT perspective. More of us will be impacted by the fact that we must ensure the correct records are kept in the event of a VAT audit.
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