1st April VAT rules change – not a joke

By: Margaret Scott

1st April VAT rules change – not a joke. The changes to the VAT rules relating to Prompt Payment Discounts may cause some problems, please do not hesitate to contact us for clarification and assistance.

The following information relates to a Sage Bulletin.

Sage

PDP – Prompt Payment Discount – what to do when you raise or receive a VAT invoice offering a PPD from the 1 April 2015 when the change takes effect.

Summary of Changes

Currently where businesses offer PPD terms to customers they calculate the VAT due on the discounted price. If the discount is not taken up HMRC does not require businesses to alter the amount of VAT invoiced and accounted for.

For example:

“.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.”How can Sage ERP X3 customers meet these requirements?

 

  1. Correctly calculate VAT on Invoices.

Currently VAT may be calculated on the full value or the discounted value of an invoice, this is controlled the parameter BRIDISC.

From the 1st April 2015 to be in line with the new legislation, VAT must be calculated on the full value of an invoice:

  • In Sage ERP X3 V6 the parameter BRIDISC should be set to NO
  • In Sage ERP X3 V7 the parameter DEPMGTMOD (Discount management mode) should be set to 2 (Breakdown by VAT).
  • The payment attribute used for Early Settlement Discount should be set to Tax Recovery

From the 1st April 2015, businesses must account for VAT on the full consideration received for supplies of goods and services. Therefore invoices must calculate VAT with no reduction for PPD.

Where a discount is subsequently taken, it is therefore necessary to ensure VAT records are amended to reflect the lower VAT amount. Businesses may comply with this change in two ways;

  • Credit Notes must be issued for the difference.
  • Each party must make appropriate internal accounting adjustments.

When choosing the latter option businesses must add suitable wording to the terms of any discount.

  1. Provide details of Customer VAT responsibilities on Sales Invoices

We would recommend that our customers add suitable wording to their settlement discount terms rather than issue credit notes for each discount taken.

(Note: In the HMRC guidance there is an optional requirement for the invoice to show Total Gross, Total VAT and Total Net amounts with and without the discount appliedSage ERPX3 only shows totals without the discount applied).

  1. Make appropriate internal accounting adjustments

Sage ERP X3 has functionality to “claw back” VAT. VAT is calculated on the full invoice value, and when any PPD is taken in Cash Entry, the VAT element of the discount is calculated and posted to specified GL account(s), thereby recording the VAT clawed back.

If a part payment has taken place, at the time of the payment, the Settlement Discount line will have the full amount of the discount. This will also post the full amount of the VAT claw back which is not correct under the new legislation. It is recommended that customers change the ESD line on the payment to correctly account for the ESD on the part payment. This will result in the posting of the part of the VAT claw back that is relevant on the payment.

In the instance of a credit note being raised after the invoice has been paid, manual adjustments will need to be done.

What does this mean

a) If the customer pays the full price they record it in their records and no VAT adjustment is necessary.

b) If the customer pays the discounted price in accordance with the PPD terms on receipt of the invoice they may record the discounted price and VAT on this in their accounts and no subsequent VAT adjustment is necessary.

c) If the customer does not pay when the invoice is first issued, they must record the full price and VAT in their records as shown on the invoice. If they subsequently decide to take-up the PPD then:

  • If the supplier’s invoice states that a credit note will be issued, the customer must adjust the VAT they claim as input tax when the credit note is received. They must retain the credit note as proof of the reduction in consideration.
  • If they have received an invoice setting out the PPD terms which states no credit note will be issued, they must adjust the VAT in their records when payment is made. They should retain a document that shows the date and amount of payment (e.g. a bank statement) in addition to the invoice to evidence the reduction in consideration.

The invoice must contain the following information (in addition to the normal invoicing requirements):

  • The terms of the PPD (PPD terms must include, but need not be limited to, the time by which the discounted price must be made).

A statement that the customer can only recover as input tax the VAT paid to the supplier.

Worked Example

Example for a Sales Invoice, with Settlement discount 10%, VAT rate 20%, using Claw back:

Before 1st April

Invoice net value is £100.00, Settlement Discount is £10.00 (10% of 100), VAT is £18.00 (20% of £90.00). Cash paid is £108.00

GL Postings:

From GL Account Credit Debit
Invoice Control £118.00
Invoice Goods £100.00
Invoice VAT £18.00
Cash Control £118.00
Cash Bank £108.00
Cash Discount £10.00

 

After 1st April

Invoice net value is £100.00, VAT is £20.00 (20% of £100.00),  Settlement Discount is £12.00 (10% of £120). Cash paid is £108.00

GL Postings :

From GL Account Credit Debit
Invoice Control £120.00
Invoice Goods £100.00
Invoice VAT £20.00
Cash Control £120.00
Cash Bank £108.00
Cash Discount £10.00
Cash Claw back VAT £2.00

 

Example for a Sales Invoice, with Settlement discount 10%, VAT rate 20%, NOT using Claw back:.

GL Postings:

From GL Account Credit Debit
Invoice Control £120.00
Invoice Goods £100.00
Invoice VAT £20.00
Cash Control £120.00
Cash Bank £108.00
Cash Discount £12.00

 

GOV.Uk image 2727733_orig

Source: Gov.UK

A 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; that is, after an invoice has been issued and before full payment is due. For example a business may offer a discount of 5% of the full price if payment is made within 14 days of the date of the invoice.

  • at present, suppliers making PPD offers are permitted to put on their invoice, and account for, the VAT due on the discounted price, even if the full price (i.e. the undiscounted amount) is subsequently paid. Customers receiving PPD offers may only recover as input tax the VAT stated on the invoice.
  • after the change, suppliers must account for VAT on the amount they actually receive and customers may recover the amount of VAT that is actually paid to the Suppliers.

Guidance

a) on issuing a VAT invoice, suppliers will enter the invoice into their accounts, and record the VAT on the full price. If offering a PPD suppliers must show the rate of the discount offered on their invoice (Regulation 14 of the VAT Regulations 1995 (SI 1995/2518)).

b) the supplier will not know if the discount has been taken-up until they are paid in accordance with the terms of the PPD offer, or the time limit for the PPD expires.

c) the supplier will need to decide, before they issue an invoice, which of the processes below they will adopt to adjust their accounts in order to record a reduction in consideration if a discount is taken-up.

d) when adjustments take place in a VAT accounting period subsequent to the period in which the supply took place the method of adjustment needs to comply with Regulation 38 of the VAT Regulations 1995 (SI 1995/2518).

e) suppliers may issue a credit note to evidence the reduction in consideration. In which case, a copy of the credit note must be retained as proof of that reduction.

f) alternatively, if they do not wish to issue a credit note, the invoice must contain the following information (in addition to the normal invoicing requirements):

  • the terms of the PPD (PPD terms must include, but need not be limited to, the time by which the discounted price must be made).
  • a statement that the customer can only recover as input tax the VAT paid to the supplier.

Additionally, it might be helpful for invoices to show:

  • the discounted price
  • the VAT on the discounted price
  • the total amount due if the PPD is taken up.

g) if a business has adopted the option at (f), the VAT invoice, containing appropriate wording as described above, together with proof of receipt of the discounted price in accordance with the terms of the PPD offer (e.g. a bank statement) will be required to evidence the reduction in consideration, and the reduction to the supplier’s output tax (in accordance with Regulation 38 of the VAT Regulations 1995).

h) we recommend businesses use the following wording on the invoice:

“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.”

i) if the discounted price is paid in accordance with the PPD terms, then the supplier must adjust their records to record the output tax on the amount actually received.

If the full amount is received no adjustment will be necessary.

Customers:

On receiving an invoice offering a PPD a VAT registered customer may recover the VAT charged, in accordance with VAT Regulation 29 of the VAT Regulations 1995.

As adjustments may take place in a VAT accounting period subsequent to the period in which the supply took place the method of adjustment needs to comply with Regulation 38 of the VAT Regulations 1995 (SI 1995/2518).

In practice this will mean:

a) if the customer pays the full price they record it in their records and no VAT adjustment is necessary.

b) if the customer pays the discounted price in accordance with the PPD terms on receipt of the invoice they may record the discounted price and VAT on this in their accounts and no subsequent VAT adjustment is necessary.

c) if the customer does not pay when the invoice is first issued, they must record the full price and VAT in their records as shown on the invoice. If they subsequently decide to take-up the PPD then:

  • if they have received an invoice setting out the PPD terms which states no credit note will be issued they must adjust the VAT in their records when payment is made. They should retain a document that shows the date and amount of payment (e.g. a bank statement) in addition to the invoice to evidence the reduction in consideration.
  • if the supplier’s invoice does not state that a credit note will not be issued, the customer must adjust the VAT they claim as input tax when the credit note is received. They must retain the credit note as proof of the reduction in consideration.

 

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