Hi All,

The gist of the change being made is that, after 1 April 2015, VAT is to be accounted for on the consideration actually received for goods / services. Consequently,  if the settlement discount is not earned, the common practice of accounting for VAT only on the discounted amount will not comply with legislation. In those circumstances, the full VAT on the full consideration received must be accounted for.

I was interested to read the ICAEW response (TAXREP 41 14) to the HMRC consultation on prompt payment or settlement discount which makes a number of suggested approaches and comments. A couple of Sage users I've been speaking to intend to stick with entering the full net amount on the invoice and then altering the VAT amount so that it is the same as the discounted VAT amount. Then, upon payment of the invoice, they'll use the discount column to record the discount. This will be fine so long as the discount is actually earned. If the settlement discount isn't earned they're suggesting a journal to raise the missing output VAT and write it off. The ICAEW paper doesn't mention this option.

Example: Commencing 1 April 2015 with, say, 5% settlement discount on standard rated goods invoiced at £100 net, the original invoice will be for £119 (£100 net + £19 VAT). Within the settlement period the customer will pay £114 (£95 net + £19 VAT) and discount of £5 will be recorded to clear the original invoice amount of £119. This meets the VAT requirements because £19 is the cash consideration of £95 for the goods charged at the standard rate of 20%. Outside the settlement period the customer will just pay the invoiced amount of £119 (£100 net + £19 VAT). This will fall foul of the new VAT requirement because the VAT accounted for must be £20 (Cash consideration £100 @ 20% = £20). The Sage users are not inclined to issue a VAT only invoice to the customer who did not take up the settlement discount (customer relations are a significant factor for them), instead they intend to process Dr Discount allowed £1 Cr Output VAT £1. Cash consideration of £100 for goods, £19 for VAT invoiced and £1 for journalled VAT = £120. This satisfies the requirement for the VAT total accounted for to be 20% of the cash consideration.

If these Sage users take this approach the implication is that, if they offer settlement discount of 5%, they're guaranteeing a discount charge of 1% on standard rated items for those customers. They're viewing this as a price they're willing to pay to avoid having to deal with credit notes, or some such, for all the customers who do avail themselves of settlement discounts. So long as the legislation (I haven't yet looked at the detail) doesn't outlaw the current practice of invoicing where the VAT on the invoice is based on the discounted amount but the goods are priced at full value, it seems a good solution for small businesses. HMRC will be quids in too, with output VAT of £20 on one side and input VAT of £19 on the other side.

What are the good people on this forum going to do to account for the VAT implications of prompt payment discount when the new rules come in? Do you think the approach outlined above is a runner?

Regards