'Go French to cut VAT paperwork for small firms'

Legislative changes from April 2015 will change the way in which businesses account for VAT when offering prompt payment discounts, a tax body is warning.

Currently, businesses can issue invoices that give details of the amount of the prompt payment discount and its terms, and show the VAT due calculated on the discounted price.

If the discount is not taken up, HM Revenue & Customs does not currently require businesses to alter the amount of VAT invoiced and accounted for.

From April 2015 however, legislation will change with the effect that businesses must account for VAT on the consideration they actually receive

In other words, VAT will soon be charged on the gross value of a sale, and then a credit note will be issued (plus VAT) if the client claims the discount to reduce the amount they pay.

The Association of Taxation Technicians says traders should be allowed to include ‘narrative’ (the details of why the refund has been made) on the original client invoices.

Such customers would be instructed to reduce any input tax that has been claimed on the sales in question if they take advantage of the discount.

The result would avoid a situation where a business might need to issue hundreds of credit notes to deal with the new rules, the ATT said in its submission to a HMRC consultation.

“This arrangement has been used in France for many years, and avoids the need to issue credit notes,” Natalie Miller, ATT’s president said of the group’s proposal.

“The new regulations are fair on the basis that the VAT payable to HMRC is based on the actual payment made by the customer, but we are concerned about the extra administrative burden this will place on many businesses as a result of the need to issue credit notes for sales where the customer has taken the discount.

“Our proposal is a common sense suggestion that will send a clear message to the customer about the need to adjust their input tax if he or she takes the discount without extra paperwork being necessary.”

HMRC is evaluating the response of the ATT and other interested parties, and says that guidance on how the VAT change is going to be made will be published before it takes effect.

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