In October 2014, it was announced by the government that an amendment to VAT legislation on prompt payment discounts (PPD), or settlement discounts as they are often referred, was to be made to clearly align UK VAT legislation with EU VAT legislation, with this measure coming into effect from the 1st April 2015.
The key change for businesses offering Settlement/PPDs will be that invoices cannot be raised with the discount already applied. The discount % and days in which the prompt payment/settlement discount can be claimed must be included on invoices and documentation but the invoice must be generated at the full value. Companies wishing to continue utilising settlement/prompt payment discounts are to raise and issue a credit for the discount if it is taken within the timscales. There is an option to include text on your invoices to say that a credit will not be sent to the customer for the reduced VAT liability but it is their responsibility to reclaim the VAT paid, however this would still mean a credit would need to be raised internally for the discount claimed and not receiving a credit will no doubt add an additional level of complexity to the customers accounting.
In order to meet the rules surrounding PPDs, credits would need to be raised individually for each invoice, should the decision be made to raise a monthly or quarterly credit for all discounts taken for a customer then this would fall under rebate scheme rules and would need to be registered accordingly.
Ultimately business will need to consider the benefits gained from offering settlement/PPD to their customers and if it is simpler to either withdraw the discount or apply it regardless of prompt payment to avoid the additional administration involved on both sides.
However for those wishing to continue using this and to coincide with these changes fully coming into effect from the start of next month, OrderWise has updated functionality in version 10.3 so that businesses still wishing to offer settlement discounts can do so lawfully. We recommend all existing users looking to make use of this new functionality to contact support for help with activating the relevant settings and making the necessary layout changes and those wishing to look at how this may affect them in more detail we would advise seeking advice from HMRC or your accountant.
To find out more about these changes you can visit this page HERE