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Published on Wednesday, 25 March 2015 12:05

Vat Changes with Settlement or Prompt Payment Discount


If you use settlement discounts and one of our software solutions and we haven't already contacted you, please contact us.

 

What’s happening?

   

From 1 April 2015, the VAT rules relating to settlement or prompt payment discounts are changing.

   

Currently, when you raise an invoice that includes a settlement discount, the VAT element is reduced by the discount rate. Your customer only has to pay the reduced VAT amount, regardless of whether or not they pay within the settlement term.

   

Under the new rules, if you're paid before or when you raise the invoice, you can create the invoice for the discounted net and VAT amounts. If the invoice isn't paid, it must show the full net and VAT amounts.

   

Example:

 

   

You issue an invoice to a customer for £100 net and £20 VAT. There's a settlement discount of 20% available to the customer.

  

  

Up to 31 March 2015

From 1 April 2015

The VAT is reduced by the settlement discount, so the invoice shows £100 net and £16 VAT.
  • If the customer has not yet paid, the invoice is for the full amount, £100 net and £20 VAT.
  • If the customer pays before the agreed date, the invoice is for the reduced amount, £80 net and £16 VAT.

 

 

 

 

 

 

 

 

 

 

 

What do I need to do?

  

To ensure you comply with the new VAT rules, there are some changes you need to make to the way you process your settlement discounts. An automatic update will be available to apply these changes when processing via the Sage 50 user interface (this will include a new invoice layout to reflect the new legislation), as all calculations originate within third party software when injected through integration, there’s some considerations for developers.

  

For any invoices / sales orders/ purchase orders dated on or after 1 April 2015 you must calculate VAT the full amount before settlement discount is applied.

 

HMRC guidance states that when a settlement discount has been taken by a customer, the supplier must issue a credit note for the value of the discount. Previously an SD transaction would be created using the non-vatable tax code (usually T9 by default), following the legislation changes a different approach must now be followed. A taxable Sales Credit transaction (SC) must be created for the value of the discount and allocated against the Sales Invoice (SI), a Sales Receipt (SR) payment should then be created and allocated paying the difference.

 

On VAT cash accounting, in order to allow for the allocation, where a mixture of tax codes has been used for the items / splits, the credit note should be created with the same mixture of codes.

  

Full details of these changes can be found in the HMRC policy paper 'Revenue and Customs Brief 49 (2014): VAT - Prompt Payment Discounts, which you can access here.

 

Note: This is a document provided by HMRC. Any queries regarding the legislation should be directed to HMRC or your local tax office.