VAT change on prompt payments

OK, sorry, this is a bit technical and accountanty, which is the worst sort of anything.

There is a concept of a "prompt payment discount" that you can put on an invoice for goods or services. In principle it is simple, pay within a certain time frame and get a discount.

Now, this has all sorts of problems. We used to do this on broadband back in the day, and people got confused. It is simple as a concept, but some people simply could not cope.

Apparently these are really common in construction, and what was fun for us, when charging such people for broadband and the like, is they routinely would both pay late and take the discount. This did not work with us, and we considered the late paid invoices under paid, and so the next invoice was even more underpaid and/or late.

What is fun on these is the VAT. The concept is that the extra you collect when late is a financial charge and outside the scope of VAT just like late payment penalties, so regardless of whether it was normal for people to pay on time or late the VAT was worked out on the discounted amount only.

Even so, the number of people confused by the idea of paying late meant paying more led to us changing our systems to actually issue a "lost prompt payment discount" invoice (with no VAT) once the payment was late. It was the only way to make them understand. The issue was that the original invoice changed. It was for one amount when they got it, but by the time they paid it, it was for another amount, and they had no way to change their accounting system to allow for that change. The separate charges for lost discount made it easier.

Anyway, in the end we stopped doing it - we do statutory late payment penalties for commercial customers and interest for consumers that pay late. They are both separate invoices issued later. Simples.

Where it gets odd is some new VAT changes. We got a VAT briefing on this recently, and I had not seen anything on it before. For the most part these changes come in next April, but apparently for some industries (telcos) it came in in April this year!

The change is all to do with aligning with the EU, apparently, but I don't get it. It also says it is prompted by the number of telcos doing this for consumers that are not VAT registered. HMRC clearly feel that they are losing out.

The change is that the VAT relates to the actual consideration received. This is a massive change as it means the VAT on an invoice issued is no longer set in stone. If I have an invoice with a prompt payment discount the VAT will depend if paid on time or late.

How the fuck does one allow for that on a VAT return? The VAT due depends on what you have invoiced, but you have Schrödinger's invoices here - the VAT is not known until the payment (or at least the deadline for payment) is reached, some time in the future.

I have emailed HMRC to ask how the hell we do this, and will be interested in the reply.

What makes this all so pointless is that, as far as I know, late payment penalties are still non VAT, so anyone doing this simply changes to lower invoices (and VAT) with late payment charges instead of prompt payment discounts. Everyone pays the same but HMRC do not get more VAT. So why the hell change the rules?

Update: HMRC actually said:-

The measure has been introduced for supplies of telecommunication and broadcasting services where there is no obligation to provide a VAT invoice from 1 May 2014.

As there is no obligation to provide a VAT invoice - i.e. supplies to people not registered for VAT - it should not be necessary to alter any invoicing at this time.

Which is mind boggling. Just because the invoice itself is not a VAT invoice does not change the fact that the supplier has to account for the VAT correctly and complete it correctly on a VAT return, which could be for end of this month - yet HMRC had no clue how they expect the system to work and are only just starting a consultation.


  1. I would expect the prompt payment discount to apply for the previously paid invoice, rather than the current one. i.e. month 1: no discount, month 2: was month 1 paid on time? if so add the discount, otherwise don't add the discount.

    1. This is not how "prompt payment discounts" used to work, and what if only ever one invoice to the customer?


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