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SETTLEMENT DISCOUNTS

Terms Code Setup

Settlement discount is set up on a client’s Terms Code, as follows:

This would allow the discount until the 28th of the month following the invoice date. This would potentially allow almost 2 months to pay if an invoice was raised and batched on the 1st of the month but not processed until the end of the month.

This would allow the discount until 30 days following the date of the invoice.

It is possible to set up two levels of settlement, Settlement Discount 1 and Settlement Discount 2, which can be used, for example, to allow a higher discount for payments made at the time of consultation.

Note: There are settings on the stock and fee files that control which products and fees are included when calculating settlement discount.

  • The Allow Discount box will allow any sort of discount, including settlement discount.

  • If the Allow Discount box is deselected, the Allow Settlement box will allow Settlement Discount only.

VAT Rules for Settlement Discount

The rules for charging VAT when settlement discount is allowed were changed on 1st April 2015.

  • Prior to this date, VAT could be charged at the discounted rate, even if the full price was subsequently paid.

  • For invoices raised after this date where settlement discount is offered, the invoice should be raised with VAT initially calculated on the full amount, with this being subsequently reduced (by raising a credit note) if the discounted payment amount was allowed.

If you always allow the discount, however, even after the qualifying payment date has expired, then the original version of settlement discount and VAT calculations in Assisi would still produce the correct VAT figures.

If you never, or only sometimes, allow overdue settlement discount, then you should contact a member of our Support Team to configure Assisi to incorporate these revised rules, as follows:-

  1. VAT will be calculated based upon the full amount of the invoice when the invoice is first raised.

  2. If the settlement discount is not allowed, the VAT will remain at this amount.

  3. If the settlement discount is allowed, then the VAT will be recalculated based upon the discounted amount.

  4. If you pay your VAT based upon the value of invoices raised in a > date range (ie Standard Accounting), then a VAT credit can be > raised automatically to take into account the recalculated > reduction in your VAT liability.

  5. If you pay VAT based upon cash received in a date range (ie Cash > Accounting), then this credit note will not be required, as the > reduced payment would automatically reduce your VAT liability.

  6. Following HMRC recommendations for the revised rules, a message can be displayed on the original invoice, as follows:

If payment is made by @SD a discount of £@SA can be deducted from the total. This includes a reduction in VAT. Following payment, you must ensure that you have recovered only the VAT actually paid, which would be £@VATSD.

Where:

@SD is the Settlement Date, by which payment must be received to qualify for the discount;

£@SA is the total discounted amount which should be paid, including the reduction in VAT; and

£@VATSD is the recalculated VAT amount.

Recording Payments with Settlement Discount Included

When recording a payment that involves a settlement discount, you can click on an invoice on the Account Overview Screen and click Transaction Information on the right-hand toolbar to display the discounted amount due in the If Paid Now field.

Original Values Discounted to:

The value of the invoice exclusive of VAT £60.00 £57.00

With a VAT amount of £12.00 £11.40

Giving a balance outstanding of £72.00 £68.40 (Amount Payable)

In this example, record a payment for the If Paid Now amount and allocate it to the correct invoice. A Discount of £3.00 will be allowed together with a subsequent reduction in VAT. A credit note can be raised automatically to recalculate your VAT liability if you pay VAT by the Standard Accounting method, ie based upon the value of invoices raised in a date range. If you pay VAT by the Cash Accounting method, ie based upon payments received in a date range, a credit note is not required as the VAT liability will be calculated based upon the actual payment received.

Automatic Allocation

If the invoice to which the payment is to be allocated is the only invoice, or the oldest invoice, outstanding on the account, then an automatic allocation will allocate the discounted payment correctly. Otherwise allocate the payment manually as follows:-

Manual Allocation

  1. Enter the If Paid Now amount into the Amount field when recording the payment.

  2. On the Record Payment screen, click on the invoice against which the payment is to be allocated.

  3. Double-click the Outstanding amount for that invoice to allocate both the amount paid in the Allocated box and the discount allowed in the Discount box.

Part Payments

If a part payment has been allocated against the invoice and the remaining balance paid on or before the due date, the discount will still be available to allocate but the VAT credit note would not be raised. It would be better, therefore, to avoid allocating part payments for invoices involving settlement discounts – maybe leave the part payment amount on the account as Unallocated Cash until such time as full payment has been made.

To Allow an Overdue Discount

A credit note cannot be automatically raised for the reduction in VAT if you allow an overdue discount, and this must be taken into account in the way that you process these transactions.

VAT Standard Accounting

If you pay your VAT by the Standard Accounting method, you should enter the If Paid Now amount when recording the payment but then raise a credit note to cover the remaining balance. Allocate this credit against the original invoice to return the outstanding balance on the invoice to zero.

In the above example, you should record a payment of £68.40 (the If Paid Now amount which includes the VAT reduction), leaving a balance outstanding on the invoice of £3.60. As there is no discount available to settle this balance, raise a credit note for -£3.00 with a corresponding VAT element of -£0.60.

VAT Cash Accounting

As reducing your VAT liability is not an issue with Cash Accounting, there is a permission – Allow Overdue Discount – that can be enabled.

Without this permission, the Discount box would be greyed out and you would not be able to allow the discount at all.

If the client pays the reduced amount in these circumstances, this would leave the invoice part-paid and the remaining balance still owing on the client’s account. You would need to raise a credit note as outlined above to settle the balance.

However, if this permission is enabled, you can click on the invoice against which the payment is to be allocated and then type the discounted amount directly into the Discount field. This will settle the invoice balance and for VAT Cash Accounting practices, not being able to raise a credit note for the reduction in VAT liability would not be an issue.

Transaction Information

Once an invoice has been paid, clicking Transaction Information again on the Account Overview Screen displays the updated invoice details showing the amount of discount allocated against the invoice.