Settlement or prompt payment discount - UK only - April 2015 onwards

From 1 April 2015, the UK VAT rules relating to settlement or prompt payment discounts changed. You should ensure you've installed Sage Accounts v22 or above, v21 Service Pack 7 or the PPD updates for Sage Accounts 2014 (v20), so the software calculates VAT on settlement discount in relation to the new legislation.

Previously, when you raised an invoice or order that included a settlement discount, the VAT element was reduced by the discount rate. Your customer only had to pay the reduced VAT amount, regardless of whether or not they paid in time to get the settlement discount.

Under the new rules, if you're paid before or when the invoice is raised, 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. The same rules apply to invoices and orders from your suppliers. The same rules apply when you create an invoice or order from your supplier.

The changes detailed in this article only apply to the UK. Under Irish legislation, VAT is already calculated at the full value when you apply a settlement discount.

Up to 31 March 2015	From 1 April 2015
The VAT is reduced by the settlement discount, so the invoice shows £100 net and £18 VAT.	If the customer hasn't yet paid Create an invoice for the full amount, £100 net and £20 VAT, stating the settlement terms. If the customer pays within the settlement terms, a credit note is issued for £10 net and £2 VAT. Use this method if you want a record of the discount you've given.
If the customer pays before or as you raise the invoice Create an invoice for the reduced amount, £90 net and £18 VAT.

This article provides details of the new UK VAT rules and how to process settlement discounts in Sage Accounts from 1 April 2015. You can also find out more in the HMRC guide VAT - Prompt Payment Discounts. If you have any queries about specific VAT implications for your business, please refer to HMRC.

Before you start

A new option is available to help you post your prompt payment discounts. To ensure this feature is enabled, please install the latest updates to your software from www.sage.co.uk/au

Customer pays before or at point of invoice

Create an invoice for the discounted amount.

For example, you've a customer to invoice for £100 net and £20 VAT, with a settlement discount of 20%. Create an invoice for the discounted amount, £80 net and £16 VAT.

If you want to record how much discount you've given, use steps in the section Customer pays the invoice later.

Customer pays the invoice later

There are two methods you can use to deal with settlement discounts taken:

Method 1 - Sage Accounts v22 and above - Post a discount with VAT included on customer receipt

1. Show the terms of the settlement discount on your invoices

To post settlement discounts this way, you must ensure that the invoices you issue:

Show the rate of settlement discount that will apply if the customer pays within the settlement terms, and when it must be paid by.
Advise the customer that they can only recover the actual VAT amount paid and that no credit note will be issued for the discount amount.

In Sage Accounts v22 there's an invoice layout available called A4 Inv Settlement Discount - Plain Paper (Print or Email). This layout shows the settlement discount terms below the delivery address at the bottom of the layout. If you prefer you can edit your own invoice layout to add settlement terms. For more information, refer to the Edit your invoice layout tab.

2. To post a discount with VAT included on the customer receipt

Watch a quick demo >>

If the customer pays the invoice by the agreed date, post a discount with VAT included when you record the sales receipt for the amount received.

In the steps below, the following example is used: A sales invoice for £120, which is made up from £100 net plus £20 VAT, with a settlement discount of 10%.

Bank accounts > Customer receipt.
Choose the customer account > enter the receipt date, amount and any reference you want.
For the outstanding invoice > click the Receipt column > enter the amount the customer has paid. In our example, the amount paid is £90 + VAT = £108
For the outstanding invoice > click the Discount column > enter the discount > Save > Close. In our example, the discount amount is £10 + VAT = £12
As the settlement discount should include VAT, check the Discount inc. VAT? check box.
Save.

You've now recorded the customer receipt and settlement discount. The discount posts a credit note that records the net discount, £10, against the nominal code, 4009, and reduces your sales tax liability by the VAT element of the discount, in this example, £2.

Method 1 - Sage Accounts v21 and below - Post a batch customer credit

1. Show the terms of the settlement discount on your invoices

To post settlement discounts as batch credits, you must ensure that the invoices you issue:

Show the rate of settlement discount that will apply if the customer pays within the settlement terms, and when it must be paid by.
Advise the customer that they can only recover the actual VAT amount paid and that no credit note will be issued for the discount amount.

If you're using Sage Accounts 2013 (v19) or above, when you install your software update, this installs an additional invoice layout called A4 Inv Settlement Discount - Plain Paper (Print or Email). This layout shows the settlement discount terms below the delivery address at the bottom of the layout. If you prefer, or if you're using Sage Accounts 2012 (v18) or below, you can edit your own invoice layout to add settlement terms. For more information, refer to the Edit your invoice layout tab.

2. To post a batch credit and sales receipt to record settlement discount taken

If the customer pays the invoice by the agreed date, post a batch credit for the discount and record the sales receipt for the amount received.

If you credit an invoice dated before 01/04/2015, and you'd like to reduce the VAT value on the credit note to match the invoice, go to Settings > Company Preferences > VAT > select Item VAT Amendable > OK. Then when entering the credit note, enter the required VAT value.

Customers > Batch credit.
Sage Accounts 2012 (v18) and below - Customers > Credit.

Complete the Batch Customer Credit window as follows:

Date	N/C	Net	T/C	VAT
Enter date the invoice was paid.	Enter the relevant discount nominal code, for example, 4009.	The net proportion of the discount taken.	The same tax code as the original invoice.	The VAT proportion of the discount taken.

If the invoice contains a mixture of tax codes, to ensure your VAT Return is correct, you must split the discount between the relevant tax codes on the credit note. For example, an invoice shows a settlement discount of 10% and has the following items:

£100 net, £20 VAT, tax code T1
£200 net, £0 VAT, tax code T0

The credit note should therefore show the following:

£10 net, £2 VAT, tax code T1
£20 net, £0 VAT, tax code T0

Save > Close.
Bank accounts > Customer receipt.
Sage Accounts 2014 (v20) and below - Bank > Customer Receipt.
Choose the customer account > enter the receipt date, amount and any reference you want.
For the outstanding invoice > click the Receipt column > Pay in Full > for the outstanding credit > click the Receipt column > Pay in Full > check the Analysis Total shows the amount received from the customer > Save > Close. When posting a customer receipt, don't use the discount column for settlement discounts. This calculates the VAT incorrectly.

You've now recorded the customer receipt and a batch credit for the discount. The credit records the net discount taken in the relevant nominal account, and reduces your sales tax liability by the VAT element of the discount.

Method 2 - Issue a full credit note to the customer for the discount taken

If your customer pays you within the settlement period and takes the discount, and your original invoice didn't show the following information:

Show the rate of settlement discount that will apply if the customer pays within the settlement terms, and when it must be paid by.
Advise the customer that they can only recover the actual VAT amount paid and that no credit note will be issued for the discount amount.

You must issue a credit note to your customer for the discount amount. You can then allocate this to the invoice along with the payment received.

If you credit an invoice dated before 01/04/2015, and you'd like to reduce the VAT value on the credit note to match the invoice, go to Settings > Company Preferences > VAT > select Item VAT Amendable > OK. Then within the credit note, click on each line, press F3, and enter the required VAT value.

Invoices and credits > New credit > Format > Choose Service.
Sage Accounts 2014 (v20) and below - Customers > Invoice List > New/Edit Invoice > Type > choose Credit > Format > Choose Service.
Date > enter the date you received payment from your customer > A/C > choose the customer account.
Details > enter the relevant details, for example, Settlement discount > press F3.
Edit Item Line window > Qty/Hours > enter 1 > Unit Price > enter the net element of the discount > Nominal > enter the relevant discount nominal code, for example, 4009 > Tax Code > enter the same tax code used on the original invoice > OK.
If the invoice contains a mixture of tax codes, to ensure your VAT Return is correct, you must split the discount between the relevant tax codes on the credit note. For example, an invoice shows a settlement discount of 10% and has the following items:

£100 net, £20 VAT, tax code T1
£200 net, £0 VAT, tax code T0

The credit note should therefore show the following:

£10 net, £2 VAT, tax code T1
£20 net, £0 VAT, tax code T0
Save > Close > select the credit note > Update ledgers > Printer > OK > OK.
Bank accounts > Customer receipt.
Sage Accounts 2014 (v20) and below - Bank > Customer Receipt.
Choose the customer account > enter the receipt date, amount and any reference you want.
For the outstanding invoice > click the Receipt column > Pay in Full > for the outstanding credit > click the Receipt column > Pay in Full > check the Analysis Total shows the amount received from the customer > Save > Close. When posting a customer receipt, don't use the discount column for settlement discounts. This calculates the VAT incorrectly.

You've now recorded the customer receipt and issued a credit note for the discount which you should give to your customer. The credit note records the net discount taken in the relevant nominal account, and reduces your sales tax liability by the VAT element of the discount.

Settlement discount from your supplier

Sage Accounts v22 and above

Sage Accounts v21 and below

Enter the invoice or order for the full net and VAT value.

If you meet the settlement terms, create a supplier batch credit note for the discount and offset it against the purchase invoice.

Suppliers > Batch credit.

Complete the Batch Supplier Credit window as follows:

Date	N/C	Net	T/C	VAT
Enter date the invoice was paid.	Enter the relevant discount nominal code, for example, 5009.	The net proportion of the discount taken.	The same tax code as the original invoice.	The VAT proportion of the discount taken.

Save > Close.
Bank accounts > Supplier payment.
Sage Accounts 2014 (v20) and below - Bank > Supplier Payment.
Choose the supplier account > enter the payment date, amount and any reference you want.
For the outstanding invoice > click the Payment column > Pay in Full > for the outstanding credit > click the Payment column > Pay in Full > check the Analysis Total shows the amount to be pad to the supplier > Save > Close. When posting a supplier payment, don't use the discount column for settlement discounts. This calculates the VAT incorrectly.

You've now recorded the supplier payment and a batch credit for the discount. The credit records the net discount taken in the relevant nominal account, and reduces your purchase tax liability by the VAT element of the discount.

Edit your sales invoice layout

To post settlement discounts as batch credits, you must ensure that the invoices you issue:

Show the rate of settlement discount that will apply if the customer pays within the settlement terms, and when it must be paid by.
Advise the customer that they can only recover the actual VAT amount paid and that no credit note will be issued for the discount amount.

To edit your invoice layout to show the required settlement discount information

These steps assume that you've entered your settlement discount information in the customer records in Settlement Due and Sett. Discount. If your settlement terms are the same on every invoice, you can simply add these as a text box instead.

Select the required invoice layout > Edit.
Report menu > Report Properties > enter a new name and description for the layout > OK.
Report Designer v1.3 and below - Properties > Name > enter a new layout name > Enter.

$rep_des_ver_check
Toolbox menu > Add Expression.
Report Designer v1.3 and below - Toolbox menu > Expression.
Click the area on the layout where you want the settlement terms to appear.
Expression Editor window > enter the following expression:
If you add the expression to a footer, ensure that Function is set to None:
- Highlighting the expression > Properties Pane > Function > make sure it's set to None.
FormatString(
"A discount of {0:N2}% of the full price applies if payment is made within {1} days of the invoice date. No credit note will be issued. Following payment you must ensure you've only recovered the VAT actually paid. If you pay within {1} days the discounted price is {2}{3:N2}",
INVOICE.SETTLEMENT_DISC_RATE, INVOICE.SETTLEMENT_DUE_DAYS, (CURRENCY.SYMBOL !="" ? CURRENCY.SYMBOL : CURRENCY.CODE),
(COMPANY.COUNTRY_CODE = "IE"
? (((100-INVOICE.SETTLEMENT_DISC_RATE)/100)*INVOICE.FOREIGN_ITEMS_NET) + INVOICE.FOREIGN_INVOICE_TAX + INVOICE.FOREIGN_CARR_GROSS
: (((100 - INVOICE.SETTLEMENT_DISC_RATE)/100) * INVOICE.FOREIGN_ITEMS_GROSS) + INVOICE.FOREIGN_CARR_GROSS)) If you're viewing this article on-screen, you can copy and paste the expression into the Expression Editor window.
OK > select the new expression > if required, click and drag until the box is wide enough to display the text.
Properties pane > Conditional Formatting > Edit > if a Modify Filter window appears, click Use Advanced Filter > enter the following expression:
INVOICE.INVOICE_OR_CREDIT NOT LIKE "Invoice" OR INVOICE.SETTLEMENT_DISC_RATE = 0
OK > Properties tab > Suppress Printing > choose True > OK.
File > Save As > File name > enter a new file name > Save > File > Exit.

You've now amended your invoice layout to display your settlement discount terms on invoices. If you're printing a credit note, or if the settlement discount rate is zero, the text doesn't appear.