With effect from 1 April 2015, the rules on prompt payment or settlement discounts are changing.
The new rules will apply to any invoices raised from 1 April onwards. From this point, the full amount of VAT should be charged when the invoice is raised. If payment is then received in time for agreed settlement discounts to apply, a credit note can be raised, to reflect the discounted amount, again with the correct amount of VAT applied to the discount.
The exception to the rule is pro-forma invoices, which are paid on or before the VAT invoice is raised. In this case, the invoice can be raised for the discounted net and VAT amounts.
Any invoices issued under the old system prior to 1 April, will operate under the old system.
If you use Sage software, please see the tip that follows, to help you make the changes correctly.
Sage 50 Accounts – Updating your software for the changes to Prompt Payment & Settlement Discounts
The new rules come into force on 1 April. If you apply these discounts and have Sage cover, you will need to ensure that you have downloaded the appropriate update before issuing any April invoices. The latest version V21 also installs an updated invoice layout, called A4 Inv Settlement Discount – Plain Paper (Print or email) which will show the settlement discount terms below the delivery address at the bottom of the layout.
If you do not have Sage Cover and have version 15 or later, the manual fixes below will help to reset your system for the new rules. This should be undertaken prior to issuing April invoices.
Please note: Once applied, the changes will affect any new invoices issued, regardless of the date of invoice.
Option 1: Amend each customer individually. Open each customer, go to the Credit Control Tab and clear the settlement discount box, transferring the information if required to a separate box e.g. Analysis 1 if required for your records.
Option 2: Amend all affected customer records in one go, by using Batch Changes, which is available from Version 15 onwards.
- Take a full backup and check data (this is very important in case any accidental amendments are made) dealing with any errors or warnings before proceeding.
- In the Customer module, highlight all customers affected (highlight one, click swap, highlight the remaining customer so that all are selected).
- Click on the Batch Changes button. Great care is required when using this powerful tool, as any amendments made here will affect all highlighted customers.
- When the Batch Changes record opens, click on the Credit Control tab.
- Clear any amounts in the Settlement Discount Box.
- As with Option One to retain settlement discount information for future reference, this will need to be entered in another box e.g. Analysis 1.
- Check the change has taken effect correctly, then click Save.
- Clear the highlights and check a customer record, to ensure that the changes have taken place correctly before proceeding.
- These steps ensure that VAT is calculated correctly at the appropriate rate when the invoice is produced. If not using the latest version V21, please also check the stationery layout used for invoicing, to ensure that terms of settlement discount are displaying correctly. A text box can be added to the invoice layout to display these terms, if required.