Prompt Payment Discount

HMRC are changing the rules – From 1 April 2015 UK VAT legislation will be brought into line with EU VAT legislation

When processing an invoice, VAT will be calculated on the goods value before any settlement discount is applied. The change will affect any business that either receives or gives settlement discount for prompt payment of an invoice.

When the legislation change becomes effective, HMRC will expect to receive the full value of VAT on an Invoice if the settlement discount is offered but not taken and make an accounting adjustment if discount is taken. These changes will necessitate Pegasus users to consider their working practices before and after 1 April 2015.

If an Invoice is paid within time to receive an early settlement discount, HMRC expect the discounted VAT value and discounted Goods value to be recorded in the relevant tax period, this is also a change in existing accounting rules.

HMRC have confirmed that there will be no transition period at 01/04/2015 therefore any unbilled Sales Orders created before April 2015 will require billing from 01/04/2015 under the new rules.

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Here’s an example of how PPD will work:

The customer orders £100,000 of standard VAT rated goods item on 01/04/2015 and is offered a 10% Settlement Discount (Rate 1) for payment within 10 Days and 5% Settlement Discount (Rate 2) for payment within 15 Days.

Before 01/04/2015, the VAT Charge would be £18,000 (£100,000 – 10% * 20%) and the treasury would expect £18,000 to be paid by the customer regardless of whether the early settlement offer was taken up or not. This means that the treasury are not receiving up to £2,000 on VAT due on the invoice if the early settlement offer is not taken up.

On and after 01/04/2015, the initial VAT Charge would be £20,000 (£100,000 * 20%) regardless and the treasury would expect £20,000 to be paid the customer if the early settlement offer was not taken. If full payment was made within the terms of the first settlement rate i.e. within 10 days of the Invoice date, the treasury would expect £18,000 to be paid by the consumer (£100,000 – 10% * 20%) and £19,000 to be paid by the consumer (£100,000 – 5% * 20%) if the full settlement was actioned between days 11-15 of the invoice date.

For details on this legal change, see the official website of the HMRC.

For further details on PPD please contact us.

Find out how our different software solutions will implement the changes in the Legislation changes for Prompt Payment Discount by clicking one of the buttons below;