09 April 2020 - Article
On a similar topic to the franchise rebates, a warning that the age old rule concerning prompt payment discounts is changing on 1 April 2015. The old rule is/was that the VAT charge was based on the discounted price whether or not the customer qualified for the discount. The new rule, from April, is that the VAT charge must be based on what is actually charged.
At first blush this sounds entirely logical, but it will create problems and perhaps discourage the practice altogether. The problem is that the ‘old’ rule allowed an invoice to be issued which had the correct VAT amount on it irrespective of the final price. This meant that you only had one invoice to issue. The new rule will mean that the initial invoice will not necessarily show the correct VAT figure because you do not know whether the customer has qualified for the discount. HMRC has given some helpful guidance and options in Brief 49(2014). You can either issue a credit note and replacement invoice or issue a ‘one time only invoice’ which says the following: “A discount of X% of the full price applies if payment is made within Y days of the invoice date. No credit note will be issued. Following payment you must ensure you have only recovered the VAT actually paid.”
This means that the invoice shows VAT on the maximum price, but the customer has to claim only the level of VAT commensurate with what he ends up paying under the discount terms. This means that all invoices carrying this rubric will be regarded by HMRC as implying a possible over-recovery of VAT, and the customer will need to prove that he paid the full amount if he is to claim all of the VAT. This means keeping proof of payment by the relevant date (not merely proof that it was paid on some date or other, since it would be possible to get some of your money back later on the basis of having paid in time for the discount).
So, not so simple after all.