As of 1st April 2015 HMRC have changed the VAT rules concerning settlement and prompt payment discounts.

It used to be that when you raised and invoice or order which included the settlement discount that the VAT on the document was reduced assuming the customer had paid within the term.  Even if they paid late the VAT element was still left at this lower level.

Under the new rules, if you’re paid before or when the invoice is raised then you can create the invoice for the discounted net and VAT amounts.  If the invoice is not paid however then the invoice or order must show the full net and VAT amounts due.

Dealing with Discounts after the Invoice is raised

For example, if your customer owes you £100 but they have an agreed settlement discount of 20%.

Previously – you would have raised and invoice showing the £100 but the VAT would have been 20% of £80  – showing £16.

New Method

  • If the invoice is paid in advance of being raised then the invoice should show £80 net and £16 VAT.
  • If the invoice is not paid when you raise the invoice then you must show £100 net and £20 VAT on the invoice.  If the customer pays within your terms then you raise a credit note for £20 net and £4 VAT to offset against the outstanding part of the invoice.

Action Required

You can see a full description of these changes and what action is required on the Sage knowledgebase article Sage Accounts – To account for VAT when using settlement or prompt payment discount.

If you are on Sage 50 or Sage Instant 2015 then downloading Service Pack 5 will provide the update you need to correctly manage your discounts, including a new Invoice design layout called A4 Inv Settlement Discount – Plain Paper (Print or Email).  This new invoice layout shows the settlement discount terms at the bottom of the layout.

If you are on an older version of Sage then you can download the PPD Update from www.sage.co.uk/au for your appropriate version.  This is only available for Sage 2011 (17) and above.

Remember if your customer pays the discounted amount you will still need to raise either a batch credit or a credit note for the difference to ensure you are accounting for the discount correctly.

Need Help ?

If you have an older version of Sage and you would like to upgrade to the latest version, or you are interested in taking out Sage Cover then call us here at Silicon Bullet for a quote.  We can also help you to edit the new invoice design to add your own logo, bank details, or any other information you might want to include on your new invoice.

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