Do you give prompt payment discounts? If so then the law is set to change

Currently, when offering a prompt payment discount, the VAT on the invoice you raise is calculated upon the discounted rate.

If the discount is not taken up, HMRC has not as yet required businesses to alter the amount of VAT invoiced and accounted for.

HMRC are now proposing that from 1 April 2015, businesses will have to charge VAT on the full invoice price (goods amount), as opposed to the discounted price where settlement applies. This will have a significant impact on businesses that offer discounts to their customers and the VAT accounting arrangements for both the supplier and purchaser.

The new proposals are based on assumption that the discount is not taken up.  Subsequent adjustments will then be required to adjust VAT where a customer takes up a prompt payment discount that has been offered, by crediting the previous invoice and re-invoicing for the corrected amount or issuing a credit note.

The changes are being made to the UK rules to bring them into line with the Principal VAT Directive. It is likely that those giving prompt payment discounts will require updates to software packages and processes to make sure that the business is charging the right amount of output VAT.

More detailed information on VAT on prompt payments can be downlowded here