Guidance for the Settlement Discount VAT changes – scheduled 1st April 2015
From 1st April, HRMC are making changes to the way in which prompt payment discounts (PPD) are to be calculated.
HM Revenue & Customs (HMRC) has until now interpreted UK legislation to allow suppliers to account for VAT on the
discounted price offered for prompt payment even when that discount is not taken up.
This interpretation is to be changed to bring it in to line with the Principal VAT Directive (PVD) which requires VAT to be
accounted for on the consideration actually received.
More detail on the consultation and full outcome can be found here:
And the latest guidance from HMRC can be found here:
HMRC has advised that each supplier will need to decide, before issuing an invoice, whether to adjust their accounts
using a Credit Note or an adjustment to their accounting records.
It is expected that few (if any) companies will choose the credit note route for their sales with PPD – HMRC expect the
overwhelming majority to choose the option to issue a single invoice with appropriate wording regarding the discount and
VAT, and not issue a further Credit Note.
As such, we are making changes within Horizons, Dimensions, and Dimensions Lite to assist with this process of making
a retrospective change to the VAT values without the need to raise a Credit Note.
What does this mean?
As far as the users of Dimensions, Dimensions Lite, and Horizons are concerned there will be no need to raise or
process Credit Notes to adjust the VAT value. The software will streamline the process of making the retrospective
accounting adjustment on processing the receipt or payment of the invoice. Companies paying purchase invoices with
Settlement Discount will be able to make the VAT adjustment at payment time regardless of whether or not the supplier
will be issuing a credit note: any credit note received purely for VAT adjustment would simply be filed without having to
be processed.
To utilise these new features customers will need to be running the correct version of our software. In order to ease
disruption we are looking to make changes not only to the current software versions but to provide Service Packs to
cover older versions as far back as autumn 2011.
However, there will be no change made to our Foundations software and users will have to calculate and account for the
VAT on discount taken manually but will still be able to comply with the regulations.
Which versions of Dimensions?
These changes are being made to the next version of Dimensions 2.51c and service packs will be made available for the
following versions of Dimensions:
2.50F, 2.50G, 2.50H, 2.50J, 2.50K, 2.50L, 2.51A and 2.51B
Which versions of Horizons?
These changes are being made to the next version of Horizons 5.251c and service packs will be made available for the
following versions of Horizons:
5.250F, 5.250G, 5.250K
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What if I am on an older version than above or running Foundations?
If you do not wish to upgrade to a version that supports these changes then you will still be able to comply with the new
legislation, but prompt payment discounts will need to be calculated manually.
If you would like to upgrade then your Access Account Manager would be pleased to hear from you. Alternatively you
can register you interest here and we will contact you to discuss.
How can I comply without taking on the new software features?
Please find guidance below. The screen shots are based upon Dimensions but are similar across all our applications.
Switch the settlement discount method to Exclude Settlement Discount
Amend the Sales invoice to include the appropriate text describing the terms of any Settlement Discount that is
applicable and clearly stating that no credit note will be issued
When receiving or making payment where a discount has been taken the receipt will need to be manually
entered for the reduced amount.
An adjustment (using a credit note type transaction) should then be manually entered for the outstanding
balance and allocated to the Invoice
How is this different to the approach we are putting into the software?
Essentially the difference is that, in the amended software, the process described above is automated as part of the Bulk
Receipts and Remittances processes. In addition, any credit note transactions automatically generated will be marked
as PPD to aid further data analysis.
Please note that if you use Bulk Receipts and Remittances in conjunction with the “Exclude Settlement Discount from
VAT Calculation” option then a ledger adjustment transaction will be automatically generated for the Settlement Discount
which will not adjust the VAT as now required.
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How will the new approach work in the software?
On raising a Sales Order with Settlement Discount terms, the invoice document will describe the terms of the Settlement
Discount and clearly state that no credit note will be issued.
Once you have received payment from your Customer, if Settlement Discount has been taken up then on generating the
receipt via Bulk Receipts a sales type credit note transaction will be generated to adjust the accounts.
Instead of adding an additional detail line to the receipt for the Settlement Discount (as per functionality in 2.51b and
earlier), a new Credit Note type transaction will be created for the Settlement Discount. As the invoice being paid could
have multiple detail lines with different VAT Rates when the Settlement Discount adjustment is created, the system will
roll up the detail lines by VAT Rate. The Settlement Discount will be calculated using the Gross Value of the Invoice and
then Net and VAT will be calculated using the Gross Discount value.
If Settlement Discount has not been taken up then no adjustment will be necessary.
When you receive an invoice from your supplier which includes Settlement Discount, it will state whether or not the
Settlement Discount will be adjusted via a Credit Note. The Invoice should be processed so that you recover the full VAT
When you make payment and take up Settlement Discount, an adjustment should be made to your accounts. If using
Cash Allocations then you will have to manually enter an adjustment (as a Purchase Ledger type Credit Note to ensure
that VAT is adjusted correctly) and include this with the invoice and payment when allocating. If using Remittances then
the system will automatically post this adjustment (using a purchase ledger type credit note transaction which will update
the Purchase Discount account rather than Purchases).
If you are expecting a Credit Note from your supplier then you will need to file the Credit Note without processing it via
I don’t offer settlement discount on my sales or purchases – how will this affect me?
This change should not affect your business but please check that your suppliers are not offering these terms
unbeknown to you – in which case you will need to process a tax change when prompt payment is made.
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