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VT Transaction+

Navigation: Issuing invoices to customers

Prompt payment discounts

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Under current VAT rules from HMRC, sales invoices that offer a prompt payment discount must be invoiced at the undiscounted amount plus VAT on that amount, in the same way as for a normal invoice. If the customer takes the discount, the discount should be accounted for at the time of payment.

In VT Transaction+, details of the discount offered can be entered in the Optional Text boxes when raising the sales invoice.

To account for a prompt payment discount

Before raising the invoice, you must decide how you will account for the PPD, should the customer take it.

Option 1: Issue a credit note to the customer for the discount plus VAT. For example, if you invoiced a customer for £120 inc VAT (£100 + VAT) that offered a 5% discount, and they pay you £114 inc VAT (£95 + VAT), you would issue a credit note for £6 inc VAT (£5 + VAT).

 OR:

Option 2: Enter a journal to account for the discount plus VAT:

oDebit: The income account - by the discount (net of VAT).

oDebit: The output VAT account - by the VAT on the discount.

oCredit: The customer account - by the discount (gross of VAT).

For example, a journal to account for a discount taken of 5% on an invoice for £120 inc VAT (£100 + VAT):

Ledger

Account

Debit

Credit

Income

Sales

5.00


Creditors

Output VAT

1.00


Customers

A Customer


6.00

If you decide to take option 2, HMRC recommends in their guidance, that invoices state the following:

'A discount of X% of the full price applies if payment is made within Y days of the invoice date. No credit note will be issued. Following payment, you must ensure you have only recovered the VAT actually paid.'

This can be done by entering text in the Optional Text boxes directly on the invoice, or on an invoice template.

If the customer pays the discounted amount before you generate the invoice, you can simply raise the invoice for the discounted amount plus VAT on that amount.

Accounting standards

Certain accounting standards require you to account for sales at the discounted amount when raising the invoice, if it is likely that the customer will take the discount. This conflicts with the treatment above required by HMRC. If the accounting standards you prepare accounts under require this, you should still raise the invoice as described above, to satisfy HMRC requirements. You can then make a journal adjustment to reduce your sales and customer accounts by the discount amount, using the JRN transaction entry.