Clause 102 - VAT: prompt payment discounts

Finance Bill – in a Public Bill Committee at 3:00 pm on 10 June 2014.

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Question proposed, That the clause stand part of the Bill.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

Clause 102 changes an interpretation of EU VAT rules on prompt payment discounts that HMRC and its predecessor have adopted since the inception of those rules. A prompt payment discount is exactly as it sounds: it is a discount given by a supplier for prompt payment, normally within 30 days. HMRC’s current interpretation of the UK legislation allows suppliers to account for VAT on the discounted price even if prompt payment is not made and no discount is given. For example, if a customer buys goods that are priced at £1,000 and is told that if they pay within 30 days they will get a discount of 2.5% and pay £975, the supplier can subsequently account for VAT on £975 even if the prompt payment discount was not used and the customer paid £1,000.

After the change has been made, HMRC will require VAT to be accounted for on the amount that was actually received, to bring the system into line with EU legislation. HMRC has suggested that legal developments have forced it to change its view about the requirements of the European legislation. I have not been able to tell whether the change is motivated by tax losses arising from the current interpretation of the rules. According to the tax information and impact note, the measure is not expected to have an Exchequer impact. I would be grateful if the Minister could explain the thinking behind the change and why it was felt necessary to change the treatment of existing prompt payment discount rules.

The Chartered Institute of Taxation has expressed a concern that the change is being made in haste. The institute believes that no change in the treatment of the rules on prompt payment discounts should be made until the European Court of Justice rules that such treatment is not in accordance with EU VAT law. I would be grateful if the Minister would comment on the concerns raised by the CIOT and other stakeholders. That point goes back to the thinking behind why the Government chose to make this change now, rather than wait for case law to that effect.

The change being made is significant. The impact note states that up to 250,000 businesses may be affected, that the cost of the change will be about £8 million and that ongoing costs will be about £3.5 million per annum. Will the Minister tell us how the change will be publicised to affected businesses, and will he clarify when the proposed consultation will be carried out?

Photo of David Gauke David Gauke The Exchequer Secretary

The clause amends VAT legislation relating to prompt payment discounts to protect revenue. This change removes any ambiguity in UK legislation and makes clear that VAT is to be accounted for on the full consideration actually received by businesses that offer prompt payment discounts. For most businesses, the change will come into effect from 1 April 2015. However, to prevent the risk of immediate, significant revenue loss, the clause provides that suppliers of telecommunication and broadcasting services, for which there is no requirement to provide a VAT invoice, are subject to the change from 1 May 2014.

Until now, HMRC has interpreted UK legislation as allowing businesses to account for VAT on the discounted price that they offer to their customers in return for prompt payment even in circumstances where that discount is not taken up. Historically, prompt payment discounts have been offered mainly on supplies made between businesses. Consequently, the recipients of such supplies  have generally been able to reclaim any VAT charged to them. However, some large businesses are now seeking to offer prompt payment discounts to final consumers who are not able to recover the VAT charged to them. Under the existing interpretation of UK legislation, that results in a tax loss to the Exchequer because the supplier can account for VAT on the discounted amount even when the full amount is paid. In particular, HMRC has seen examples of prompt payment discounts being offered to consumers in the telecommunication and broadcasting sectors.

I turn to the hon. Lady’s question as to why this measure is being introduced now. As I set out, HMRC has seen businesses offering prompt payment discounts, which leads to under-collection of tax. The introduction of this measure now will protect an estimated £250 million a year in the telecommunication sector alone, bring UK policy and legislation clearly in line with EU law and prevent potential abuse of VAT prompt payment discount policy where businesses offer terms that few consumers can take up, which can result in an unfair competitive advantage for the supplier. I hope that that helps to explain why we wanted to move now and not wait any longer.

The clause will ensure that businesses pay less VAT only when their customers actually benefit from the discounts. It will also provide certainty for businesses that offer prompt payment discounts and align UK law clearly with EU law. For the majority of businesses, the measure will take effect from 1 April 2015, but for suppliers of telecommunication and broadcasting services, for which there is no obligation to issue a VAT invoice, the change came into effect on 1 May 2014. There is no obligation to provide a VAT invoice to unregistered people or businesses, so the measure will mainly affect supplies to final consumers. Should HMRC identify the risk of significant revenue loss in other sectors, the implementation of the measure may similarly be brought forward by secondary legislation.

As the hon. Lady said, about 250,000 businesses offer prompt payment discounts, and this measure will have an impact only on businesses that account for VAT on the discounted amount and their customers. HMRC estimates that if all those businesses have to implement the changes there will be a one-off total cost of £8 million; ongoing costs will be £3.5 million per annum. HMRC will issue a consultation document on how businesses that issue VAT invoices should invoice in circumstances where the offer of a prompt payment discount is made. The consultation will be published shortly, certainly by the end of this month.

The hon. Lady asked how the changes would be publicised. There was the Budget announcement, and the consultation will further publicise potential changes. HMRC will also monitor compliance and taxpayer awareness to ensure that the businesses affected are aware of the changes.

In conclusion, the clause ensures that businesses that offer prompt payment discounts will have to account for VAT on the consideration they actually receive, protecting UK revenue. It also ensures there is no ambiguity in UK prompt payment discount VAT legislation, and that it correctly reflects EU law.

Question put and agreed to.

Clause 102 accordingly ordered to stand part of the Bill.