Two VAT changes for 2015: Prompt Payment Discounts and Digital Services

On 22 and 29 December 2014, HMRC issued two documents: a Brief on prompt payment discounts and Guidance on the new VAT rules for digital services.

Prompt Payment Discounts

We reported on 19 March 2014 the announcement of new rules on how VAT is recorded when prompt payment discounts are offered.  HMRC have now stated their policy regarding the new rules, which will take effect on 1 April 2015.  This imposes requirements on both supplier and customer.

Supplier:

A supplier offering discounts for prompt payment would previously record only the discounted amount as their net sale and would charge VAT only on this discounted amount.  This would be the case whether or not payment was made promptly.

From 1 April 2015, the supplier will charge VAT on the full amount.  If a discount is offered by the supplier and earned by the customer’s prompt payment, the supplier has a choice.

  1. The supplier can issue a credit note to reflect the lower price agreed, and adjustments will be made to the VAT record accordingly.

 

  1. Alternatively, the supplier can issue no credit note and adjust their VAT record (reduce their VAT liability) if they can evidence that the total amount received from the customer was the discounted amount (e.g. from the production of bank statements) and the original sales invoice contains appropriate Prompt Payment Discount (PPD) wording.

With regard to the PPD wording, HMRC require that the original sales invoice states the terms of the PPD including that no credit note will be issued.  HMRC additionally suggest that the sales invoice shows both the full net amount (plus the VAT charge) and the discounted net amount (plus the VAT charge).

Customer:

For customers receiving a purchase invoice with an offer of a prompt payment discount, the invoice amount should be recorded in full initially, including a claim for the full VAT amount.

If payment is followed by a credit note issued by the supplier, the customer’s VAT records should reflect the credit note in the usual way.

If the supplier intends to issue no credit note, the purchaser is required to adjust their VAT records when payment is made and reduce their VAT claim against the original purchase invoice according to the actual VAT amount paid.

Digital Services

We reported previously the introduction of new VAT rules for digital services from 1 January 2015.

These new rules cause difficulty for suppliers in many ways.  For example, it is necessary to determine whether the supply is a digital supply, where the customer is located and whether the customer is in business.

The basic position is that the supplier is also required to register for and charge VAT in the EC member state of the customer; however, HMRC offer an administrative simplification in the form of the mini one stop shop (MOSS).

The MOSS only be used by businesses which are already registered for VAT.  In HMRC’s Guidance, micro businesses which are not required to be VAT registered due to their low turnover can register for VAT without charging VAT to their UK customers.  We reported on this when HMRC issued its Brief.

HMRC Guidance explains another measure to assist micro-businesses.  Businesses are required to keep two items of non-contradictory evidence to determine a customer’s member state, but micro businesses can rely on their payment service provider’s evidence for their customer location.  This relaxation by HMRC is only temporary and micro businesses will be required to collect two pieces of evidence from 1 July 2015.

These two measures introduced by HMRC to assist micro businesses, while welcomed, only address a small proportion of the issues faced by micro digital suppliers.  The single most important issue facing micro businesses is the ability to cope with the additional administrative burdens placed upon them, which may drive some to cease to trade.  This is drastic response and some micro businesses might alternatively consider whether the need to account for VAT might be instead be removed completely.

For further information and help on the new VAT rules, please contact the TaxDesk on 0845 4900 509 and ask for Kevin Hall.