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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.

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

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

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

Settlement discount from your supplier

Sage Accounts v22 and above

Sage Accounts v21 and below

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.

  1. Select the required invoice layout > Edit.
  2. 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

  3. Toolbox menu > Add Expression.

    Report Designer v1.3 and below - Toolbox menu > Expression.

  4. Click the area on the layout where you want the settlement terms to appear.
  5. 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.
  6. OK > select the new expression > if required, click and drag until the box is wide enough to display the text.
  7. 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

  8. OK > Properties tab > Suppress Printing > choose True > OK.
  9. 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.