Prompt payment provides no VAT relief

In 2014, the mobile and broadband provider TalkTalk introduced a new promotion scheme. Most of its retail customers had the opportunity to receive a 15% discount if they paid within 24 hours of receiving their bill. However, HMRC disputed TalkTalk’s VAT treatment of the promotion and entered into litigation which meant that TalkTalk was obliged to pay the VAT in dispute, some £10.6m. 

Some ten years later, the courts have announced their latest decision on the VAT treatment of this promotion scheme – in favour of HMRC – and therefore TalkTalk were unable to recover the previously paid VAT. 

VAT and prompt payment discounts

Prompt payment discounts represent a problem for VAT accounting purposes. In most cases, a bill is raised before payment is received. If a prompt payment discount is being offered, when the bill is raised it’s not possible to be certain how much the supplier will receive in payment and therefore how much VAT should be accounted for. To illustrate the problem let’s take an example. 

Up to 2014, taxpayers were only obliged to pay VAT on the discounted amount, even if the discount wasn’t earned by the customer. Thus, to the extent that customers did not take advantage of a prompt payment discount, VAT was not due on the full amount received. TalkTalk argued that those customers who were offered a Speedy Payment Discount, VAT should only be due on the discounted amount. HMRC argued that there was no prompt payment discount for VAT purposes, and that TalkTalk must account for VAT based on the amount of money that its customers ended up paying.

Then and now; how the law has changed

As part of the 2014 Budget, a change in VAT law was announced in what HMRC described at the time as a measure to "protect revenue" and align with the EU VAT directive. Unfortunately, this change made the VAT accounting for prompt payment discounts significantly more complex. 

Today, if a prompt payment discount is offered businesses have two options. They may issue a single invoice with a legend explaining the VAT accounting. Alternatively, the supplier is obliged to issue a full invoice, then a subsequent credit note (for those customers earning a prompt payment discount). Practically speaking, both options are prone to confusion and errors. 

The decision

The Upper Tribunal (UT) heard the appeal of the First-tier Tribunal’s decision (which also found in favour of HMRC). The Speedy Payment Discount was not anticipated in the drafting of the original terms and conditions signed up to by TalkTalk customers. TalkTalk argued that the offer essentially amended the terms and conditions to permit a prompt payment discount. However, the UT found that the terms and conditions were only altered if a customer accepted the discount and paid within 24 hours (regardless of whether the payment was in advance or in arrears). Thus, there was no prompt payment discount for VAT purposes.

What does this mean?

With interest rates set to remain high (at least compared to the last 15 years) for the time being it is possible that prompt payment discounts will become popular with suppliers. However, care must be taken to ensure that both the terms and conditions of any discount, as well as the invoicing approach adopted are clear.