prof.itplus Release Notes Addendum Changes to the Handling of Prompt Payment (Settlement) Discounts

prof.itplus Release Notes Addendum Changes to the Handling of Prompt Payment (Settlement) Discounts 13 th March 2015

Addendum Contents Page 1.0 Overview... 3 2.0 Background & HMRC Guidance... 3 3.0 Outline of Changes in prof.itplus... 4 4.0 Changes to prof.itplus in Detail... 5 4.1 The Switchover Date... 5 4.2 Calculation of VAT When Settlement Discount Is Available... 5 4.3 Display of Totals With Settlement Discount Deducted... 5 4.4 Printing Invoices Calculated From Sales Orders That Include Settlement Discount... 6 4.5 Posting Invoices & Credit Notes Direct To Sales Or Purchase Ledger... 6 4.6 Displaying Transactions That Include Settlement Discount... 7 4.7 Amending Transactions That Include Settlement Discount... 7 4.8 Posting & Allocating Cash For Invoices That Include Settlement Discount... 8 4.9 Generating Remittances For Purchase Invoices That Include Settlement Discount... 9 4.10 Transferring Purchase Invoices That Include Settlement Discount To A Buying Group Account... 9 4.11 Generating Direct Debit Transfers For Sales Invoices That Include Settlement Discount.. 10 4.12 Providing Evidence Of The Reduction In Consideration Of VAT For Settlement Discount. 10 4.13 Reporting On and Accounting For VAT Adjustment Transactions... 11 5.0 Example Invoice Layout... 12 prof.itplus Release notes addendum Prompt Payment Discounts Page 2

1.0 Overview From 1/4/15 the way VAT is calculated on invoices offering a prompt payment discount is changing to bring the UK into line with other EU countries. As a result, changes have been made to prof.itplus to comply with the new requirements. This document describes what the changes are, the background to the changes, and how the changes have been implemented in prof.itplus. What Are The Changes? Historically, for an invoice offering prompt payment discount, it was acceptable to calculate the VAT due on the discounted price, whether or not the discount was eventually taken, so no adjustment to VAT was required whether the discount was taken or not. From 1/4/15, VAT for an invoice offering prompt payment discount must be calculated on the full price, and an adjustment of some sort must be made to account for the reduction in VAT actually paid if the discount is subsequently taken. If no revised invoice or credit note is to be issued if the prompt payment discount is taken, any printed invoice that offers prompt payment discount must make it clear that only the amount of VAT actually paid may be recovered. 2.0 Background & HMRC Guidance Although the proposed changes to the handling of VAT for invoices offering prompt payment discounts were originally announced in the Budget of 2014, they attracted very little press coverage at the time, and many companies were unaware of the changes until quite recently. Despite the general lack of awareness, some business organisations raised objections to the proposals and a lengthy consultation process was undertaken between June and September 2014 to assess the likely impact on companies of implementing the changes. The original proposal from HMRC was that a credit note should be used to make the adjustment to the amount of VAT applicable as a result of a prompt payment discount being taken for an invoice. As a result of the consultation process, HMRC accepted that issuing a credit note for every prompt payment discount taken would be a burden on companies and that, while issuing credit notes was their preferred method, an acceptable alternative would be for an internal accounting adjustment to be made, as long as companies are able to evidence a reduction in consideration where a discount has been taken. Final guidance on how to process an invoice offering prompt payment discount was not published until 22/12/14, giving software developers and companies who offer or receive prompt payment discounts very little time to absorb the implications of the changes and a very short timescale in which to ensure that necessary software changes and updated administrative procedures are in place in time for the April 1 st deadline. For those who delight in phrases such as evidence a reduction in consideration, the guidance on how to process prompt payment discounts can be found in the document Revenue and Customs Brief 49 (2014): VAT Prompt Payment on the HMRC website at the following address: https://www.gov.uk/government/publications/revenue-and-customs-brief-49-2014-vat-promptpayment-discounts prof.itplus Release notes addendum Prompt Payment Discounts Page 3

3.0 Outline of Changes in prof.itplus Because the terminology used in prof.itplus is settlement discount, rather than prompt payment discount, all references from this point in the document will be to settlement discount. The main aims of the changes made to prof.itplus to cater for the new arrangements for handling VAT on invoices that offer settlement discounts are to fully comply with HMRC guidance whilst minimising the changes to the way in which operators use the system. With this in mind, a separate internal VAT ADJUSTMENT credit note transaction will automatically be generated to retrospectively adjust the amount of VAT accounted for whenever cash is posted against an invoice for which settlement discount has been taken. The full scope of the changes is described on the following pages. For the purposes of this document, a fictitious invoice that offers a settlement discount of 5% on standard VAT rated goods to the value of 100 has been used to illustrate how the system will operate. Under the existing rules that will still apply until 31/3/15, VAT would be calculated on the discounted goods value of 95. The invoice totals would show a total goods value of 100, a VAT value of 19, and an invoice total of 119. Depending on the tags set up for the invoice layout used, the printed invoice could confirm that, if the invoice was paid by a specified date, a 5% discount was available, that 5 could be deducted, and/or that the discounted amount to be paid would therefore be 114. Under the new rules applicable from 1/4/15, VAT would be calculated on the full goods value of 100. The invoice totals would show a total goods value of 100, a VAT value of 20, and an invoice total of 120. The printed invoice could confirm that, if the invoice was paid by a specified date, a 5% discount was available, that 6 in total could be deducted, and that the discounted invoice totals comprised of a total goods value of 95, a VAT value of 19, and an invoice total of 114. A form of words must be included on the invoice to confirm that no credit note will be issued if the discount is taken, and that only the amount of VAT actually paid can be recovered. A sample invoice generated using the new rules is included at the end of this document. Within an invoice transaction that contains settlement discount calculated using the new rules, the total settlement discount amount will be stored ( 6 in the example) as well as a breakdown of the total discount amount, split into settlement discount on the goods value ( 5) and a separate settlement discount on the VAT value ( 1). The reason for storing the breakdown is so that, if the settlement discount is taken when the invoice is paid, a VAT adjustment of - 1 can automatically be made as the cash is posted. To control whether the old or new rules should be used when calculating VAT when settlement discount is involved, the date appropriate for the calculation (today s date for quotations and orders, the invoice or credit note date for invoices and credit notes) is compared to the switchover date recorded against the company data. By default, the switchover date will be set during installation of the March Update to 1/4/15. For those sites that wish to try out the changes in advance of actually reaching the switchover date, it will be possible for someone from the Support Desk to reset the switchover date for the Test Company so that the new rules can be applied from an earlier date. Once the March Update has been installed, any site that wishes to try out the changes to the handling of settlement discounts in advance of the switchover date should contact Software Support so that the switchover date on the Test Company can be reset. prof.itplus Release notes addendum Prompt Payment Discounts Page 4

4.0 Changes to prof.itplus in Detail 4.1 The Switchover Date The date from which the new rules for VAT calculations where settlement discount is applicable will be set separately for each set of company data (to 1/4/15) as part of the installation of the March Update. The date will not be visible to prof.itplus users, but it can be reset for a Test Company by someone on the Support Desk to enable testing of the new facilities to take place in advance of the actual switchover date. 4.2 Calculation of VAT When Settlement Discount Is Available There are many circumstances in prof.itplus where VAT is calculated when settlement discount is available. When these calculations take place, a comparison will be made between the switchover date (when the new rules apply) and what is considered to be the appropriate date for the calculation. If the date for the calculation is before the switchover date, the old rules will apply (i.e. VAT is calculated on the discounted goods value), otherwise VAT will be calculated on the full goods value. In the case of a VAT calculation for an order (sales order, return order, purchase order, or debit note order) or a quotation, the eventual invoice or credit note date may not necessarily be known, so the appropriate date for the VAT calculation will be today s date. In the case of a VAT calculation for an invoice or a credit note (either manually entered or calculated from an order), the invoice date or credit note date will be the appropriate date for the calculation. The user will not need to do anything different to what would have been done prior to these changes in order for the appropriate rules to apply the programs will automatically apply the correct rules for the date of the calculation. 4.3 Display of Totals With Settlement Discount Deducted Some programs contain a Value option to display the totals for goods value, overall discount value, nett value, and (where appropriate) margin details for an order, a quotation, an invoice, or a credit note. Where a Value option exists and where settlement discount is applicable, an additional Settlement Discount section will now appear in which the settlement discount percentage, the discount value, the nett goods value, the VAT (on the nett goods value), and the discounted total value will be displayed. For purchase orders, where a second set of settlement terms are applicable, a second set of discounted totals will be displayed. prof.itplus Release notes addendum Prompt Payment Discounts Page 5

4.4 Printing Invoices Calculated From Sales Orders That Include Settlement Discount New print tags have been added to the tags available for sales invoice layouts to allow additional settlement discount information to appear on an invoice. Some of the tags include the form of works required by HMRC to explain that no credit note will be issued and that only the amount of VAT actually paid can be recovered. Other tags will show the various discounted invoice values if settlement discount is taken. A sample sales invoice containing information from the new tags is included at the end of this document. 4.5 Posting Invoices & Credit Notes Direct To Sales Or Purchase Ledger The programs used to post invoices and credit notes directly to the sales and (more likely) purchase ledgers have been modified so that, if settlement discount is applicable and if the transaction date is on or beyond the switchover date, as well as calculating a settlement discount amount for the entered goods/services value (as previously), a separate settlement discount amount will now be calculated for the entered VAT value. The label of the textbox showing the settlement discount amount for the goods/services value has been changed from Sett Disc Amnt to Sett Disc G&V and a new adjacent textbox will now display the separate settlement discount amount for the VAT value. Where a 2 nd set of settlement terms are available for a supplier, a 2 nd pair of settlement discount amounts for goods/services and VAT values will be calculated and displayed. For invoices with a transaction date that is before the switchover date, a settlement amount will only be calculated for the goods/services value and the new textbox(es) for the settlement discount amount for the VAT value will be blank and disabled. Under the new rules, for the example invoice ( 100 goods, 20 VAT, 5% settlement discount), the settlement discount amount for the goods/services value will be calculated and displayed as 5, and the separate settlement discount amount for the VAT value would be calculated and displayed as 1. The only difference from a user point of view in posting an invoice under the new rules is that an extra settlement discount amount (the one for the VAT value) will need to be confirmed. prof.itplus Release notes addendum Prompt Payment Discounts Page 6

4.6 Displaying Transactions That Include Settlement Discount The Display Customer Transactions and Display Supplier transactions programs have been modified so that, when using the Expand option to view the details of an invoice that contains settlement discount calculated under the new rules, the total amount of settlement discount available for the invoice will be broken down into a settlement discount amount for the goods value and a separate settlement discount amount for the VAT value. For the example invoice, the Sett Disc textbox would display 6 as the total settlement discount amount, the Sett Gds textbox would display 5 as the settlement discount amount for the goods value, and the Sett VAT textbox would display 1 as the settlement discount amount for the VAT value. The 1 settlement discount amount for the VAT value is recorded separately in this way so that, when the invoice is paid, a VAT adjustment can be made if the settlement discount has been taken. 4.7 Amending Transactions That Include Settlement Discount The Amend Sales Transactions and Amend Purchase Transactions programs have been modified so that, for invoices that contain settlement discount calculated under the new rules, separate textboxes will display the total settlement discount amount broken down into a settlement discount amount for the goods value and a settlement discount amount for the VAT value. The Change option allows the user to amend either or both of these values (for transactions not yet allocated) so that the settlement discount breakdown can be added, modified, or removed if necessary before the cash is posted to pay off the transaction. prof.itplus Release notes addendum Prompt Payment Discounts Page 7

4.8 Posting & Allocating Cash For Invoices That Include Settlement Discount The Post/Allocate Cash Received and Post/Allocate Cash Paid programs have been modified to cater for the requirement to automatically generate a VAT adjustment credit note transaction when paying off an invoice that contains settlement discount that has been calculated using the new rules. In terms of using the programs to post and allocate cash against an invoice that includes settlement discount, the user will not need to do anything different to what would have been done prior to these changes, but the Discnt Allowed textbox has now been split into two separate textboxes labelled DiscAllowd G&V (to break the settlement discount allowed into goods and VAT amounts). For the example invoice, if the settlement discount of 6 was taken, the amount of cash to be posted would be 114 and the invoice would be displayed in the table of transactions to be allocated with a value of 120, a settlement discount value of - 6, and a balance of 114. If the user confirms the settlement discount and balance amounts, the discount allowed on goods would be displayed as - 5 and the discount allowed on VAT would be displayed as - 1. On confirmation that the cash could be posted, a cash transaction would be generated (as before) with a total value of - 119, split into a cash value of - 114 and a discount value of - 5. What is new is that a separate VAT adjustment credit note transaction would automatically be generated with transaction date and reference the same as the cash transaction (the reference would have a letter, typically A, appended to it to make it unique), with a further reference of VAT ADJUSTMENT and a value of - 1 (goods value 0, VAT value - 1). The original invoice would be allocated against both the cash transaction and the VAT adjustment credit note transaction. prof.itplus Release notes addendum Prompt Payment Discounts Page 8

4.9 Generating Remittances For Purchase Invoices That Include Settlement Discount It has not been necessary to make any changes to the Remittance Proof List program or to the program that prints the remittances. The example invoice would appear on the proof list and on the remittance with a transaction amount of 120, a discount amount of 6, and a payment amount of 114. Where changes have been made is in the program that generates payments for remittances. If the example invoice were to be paid off on or before the settlement date using the remittance generation program, the same transactions would be generated as described above for the cash posting program. A cash transaction would be generated with a total value of - 119, split into a cash value of - 114 and a discount value of - 5, a separate credit note VAT adjustment transaction would be generated with a transaction date and reference the same as the cash transaction (the reference would have a letter, typically A, appended to it to make it unique), with a further reference of VAT ADJUSTMENT, and a value of - 1 (goods value 0, VAT value - 1). The original invoice would be allocated against both the cash transaction and the VAT adjustment credit note transaction. 4.10 Transferring Purchase Invoices That Include Settlement Discount To A Buying Group Account It has not been necessary to make any changes to the Buying Group Transfer Proof List program or to the program that prints the transfers. The example invoice would appear on the proof list and on the transfer print with a transaction amount of 120, a discount amount of 6, and a payment amount of 114. Where changes have been made is in the program that transfers the transactions to the buying group account. If the example invoice were moved to the buying group account to be paid off on or before the settlement date using the transfer program, the following transaction updates would take place: On the original supplier account: A credit note transaction would be generated with a value of - 114 (goods - 114, VAT 0). A cash transaction would be generated with a value of - 5 ( 0 cash, - 5 discount). A separate VAT adjustment credit note transaction would be generated with a value of - 1 (goods value 0, VAT value - 1). The original invoice would be allocated against both the credit note transaction, the cash transaction, and the VAT adjustment credit note transaction. On the buying group account: An invoice transaction would be generated with a value of 114 (goods 114, VAT 0). prof.itplus Release notes addendum Prompt Payment Discounts Page 9

4.11 Generating Direct Debit Transfers For Sales Invoices That Include Settlement Discount It has not been necessary to make any changes to the Direct Debit Proof List program or to the program that prints the transfer payments list. The example invoice would appear on the proof list and on the payment list with a transaction amount of 120, a discount amount of 6, and a payment amount of 114. Where changes have been made is in the program that generates direct debit transfers. If the example invoice were to be paid off on or before the settlement date using the direct debit transfers generation program, a cash transaction would be generated with a total value of - 119, split into a cash value of - 114 and a discount value of - 5, a separate VAT adjustment credit note transaction would be generated with a transaction date and reference the same as the cash transaction (the reference would have a letter, typically A, appended to it to make it unique), with a further reference of VAT ADJUSTMENT, and a value of - 1 (goods value 0, VAT value - 1). The original invoice would be allocated against both the cash transaction and the VAT adjustment credit note transaction. 4.12 Providing Evidence Of The Reduction In Consideration Of VAT For Settlement Discount Where a VAT adjustment has been generated as a result of paying off an invoice that included settlement discount, evidence of which invoice (or invoices) was paid off with settlement discount taken could be provided by using the Allocn option in the Display Customer Transactions and Display Supplier Transactions programs (or the equivalent programs for archived transactions) or by printing the Allocation Audit Trail (available on the Post Transactions/Global Amendments sub-menu in both the sales and purchase ledgers). In either case, details of the cash transaction and of the invoice(s) involved when the settlement discount was taken and the VAT adjustment transaction was generated would be shown. prof.itplus Release notes addendum Prompt Payment Discounts Page 10

4.13 Reporting On and Accounting For VAT Adjustment Transactions As VAT adjustments are generated as credit note transactions, they will appear as credit notes on the daybook and nominal audit reports in both sales and purchase ledgers. VAT adjustment transactions have a VAT value but no goods value so they will be included in the VAT figures for the standard UK VAT code in Sales/Purchase Control Totals but they will not affect the goods figures. The VAT adjustments will be included in the VAT Return in the same boxes as those updated by the VAT values from the original invoices for which the adjustments were generated. In the nominal ledger, the VAT adjustments from the sales and purchase ledgers will be posted to the nominal codes recorded for VAT in the sales and purchase ledger parameter programs. prof.itplus Release notes addendum Prompt Payment Discounts Page 11

5.0 Example Invoice Layout prof.itplus Release notes addendum Prompt Payment Discounts Page 12