1. finance
2. accounting and auditing
3. billing and invoicing

How to: Account for Settlement Discount VAT
Rule Changes from 1st of April 2015
Users of Merlin who offer Settlement Discount to their Customers, or are given Settlement Discount
by their Suppliers, will be affected by a change to the law relating to the discounting of VAT on early
settlement by HRMC Brief 49 (2014). In short this change in VAT law has been brought about by tax
avoidance practices in the Telecommunication industry and the need for UK tax law to comply with
EU laws on calculating VAT on invoices that have always rejected the possibility of discounting VAT
on Sales Invoices, which Merlin offered as Standard prior to Version 131.
HRMC Customs Brief 49 (2014) offers two alternative ways to account for VAT adjustments on
Invoices that include Settlement Discounts - Either Credit Notes can be issued where payments are
received on time, or your VAT records can be adjusted internally where payments have been
received within the terms of the settlement discount offered. Both scenarios now require that the
Sales Invoice is raised with VAT at the full goods value, before discount.
Merlin Business Software have chosen to adopt the second scenario on the Sales Ledger where
additional Credit Notes are NOT required when payments are made on time. However, on the
Purchase Ledger we have made provision for Suppliers to operate both processes allowed by HMRC.
Settlement Discounts are applied to Customer and Supplier accounts by setting up Terms Codes in
the Sales Ledger Setup menu. (Located in Setup / Sales Ledger).
A Terms Code with Settlement Discount is activated by specifying the discount percentage rate in
the Rate field of the relevant Terms Codes. Additionally, the Discount Days field is used to specify an
early settlement date when the Settlement Discount expires. This is configured in exactly the same
way as the primary due date of the terms code to allow settlement dates to be calculated from the
date of invoice, or the end of the month following the month the invoice was raised.
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How To: How To - Account for Settlement Discount VAT
Rule Changes from April 2015
The following changes within Merlin account for the amendments to the brief. These changes are
available from Version 131.033 and an upgrade to this version will be necessary if you offer or
accept Settlement Discount, as VAT can no longer be discounted on Invoices where early Settlement
Discount is made available.
Sales Ledger
Previous Method of Handling Settlement Discounts
Previously Merlin handled settlement discounts in the following way:Example: When a Sales Invoice was raised for an order of £100.00, if the customer was on 15 days
terms at which point they were entitled to a 5% Settlement Discount, the VAT would be calculated
on the goods total of £95.00 and would show as £19.00 VAT.
This would show in the analysis at the bottom the invoice as:
Goods Total £100.00
VAT
£19.00
Invoice Total £119.00
This would be followed by text explaining that if the invoice was paid by xx/xx/xxxx you could deduct
£5.00 in settlement discount.
Payment Entry
When entering the payment against the customer, Merlin would expect and allow a deduction of
£5.00.
If this was disallowed, the £5.00 would remain outstanding against the invoice and the VAT return
would remain unaffected, showing the original £19.00 from the Sales Invoice.
New Method of Handling Settlement Discounts
The changes made to account for the alterations to the legislation are as follows:Example: When a Sales Invoice is raised for an order of £100.00, if a customer is on 15 days terms at
which point they are entitled to a 5% Settlement Discount, the VAT is now calculated on the goods
total of £100.00 and will show as £20.00 VAT.
This will now show in the analysis at the bottom of the invoice as:
Goods Total £100.00
VAT
£20.00
Invoice Total £120.00
There is now a choice of two messages that can appear on the Sales Invoice, as below:-
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How To: How To - Account for Settlement Discount VAT
Rule Changes from April 2015
Option 1: Settlement (Program variable within the layout)
A discount of £6.00 of the full price applies if payment is made by 06/05/2015. No credit note will be
issued. Following payment you must ensure you have only recovered the VAT actually paid.
Option 2: Settlement_extended (Program variable within the layout)
A discount of £6.00 (Goods: £5.00, VAT: £1.00) of the full price applies if payment is made by
06/05/2015. No credit note will be issued. Following payment you must ensure you have only
recovered the VAT actually paid.
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How To: How To - Account for Settlement Discount VAT
Rule Changes from April 2015
Payment Entry
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In the Cash Receipt screen (below) the existing Merlin logic continues, in that the Payment
Amount is the Invoice Total to be cleared from the Ledger, and the discount (if available) is
the amount deducted to net to the cash received.
When entering the payment, the payment date is now critical. For example, if a Cash
Receipt is posted as of 4th of April, with settlement due on the 1st of April, Merlin will no
longer allow selection of the settlement available up until the 1st of April.
The Cash Receipt Program allows for retrospective posting of Cash Receipt transactions by
allowing the user to change the payment “Batch Date” back to the date the payment is
received. This is critical for the correct evaluation of settlement dates. (The Cash Receipt
Program uses the “Batch Date” and does NOT rely on the system date for payment
processing and settlement date evaluation.)
The payment amount must be manually changed to leave the balance as outstanding per
invoice total by editing the “Payment” amount field to the cash received for the invoice.
This will leave the discount rejected as an unpaid amount against the invoice.
NB A further software update is planned to calculate net payments where discounts have
expired automatically using “Auto Match” “Pay Oldest” “Pay Selected” and “Row Select”
double click payment methods to speed up payment processing.
If the payment is made on time, i.e. the payment date is less than or equal to the
settlement date, the operator may accept the Settlement Discount as before and the
Invoice will be marked as paid.
If the date paid is within the settlement terms and the settlement is accepted on Cash
Receipt transaction posting, a VAT adjustment is debited from the Sales Output VAT
Nominal code and the Settlement Discount Nominal Code is debited with the Net discount
taken, as per versions of Merlin. The Cash Receipts Journal shows these extra lines on the
nominal breakdown for audit purposes.
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How To: How To - Account for Settlement Discount VAT
Rule Changes from April 2015
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A supplementary record is posted to the VAT Return File with the original invoice number.
This has been suffixed with an asterisk to denote that this line is the VAT element of the
settlement discount taken by your customer.
If the payment date is greater than the settlement date, the Settlement Discount field is
greyed out and the system will not allow you to take it. (Invoice Number 000351 in the
example below) At this point HMRC no longer sees this as Settlement Discount so no
adjustment to VAT can be created on the original transaction.
Clearance of Late Paid Settlement Discount Invoices
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Rejected Settlement Discount invoices which accumulate on the Sales Ledger during the
month can be cleared either by chasing payment of these items via Customer Statements,
as discount has been taken outside the terms of the Settlement Discount offered, or by
manually creating Credit Notes and issuing them to your customers.
These additional Credit Notes are outside the scope of VAT law on Settlement Discount
processing, and so can be offered at your discretion to customers you consider to have a
case for allowance of the discount taken on late payment of the invoice. It is now law that
this credit note MUST be issued if the Settlement Discount is allowed in these
circumstances.
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How To: How To - Account for Settlement Discount VAT
Rule Changes from April 2015
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When raising Credits for this purpose we recommend you raise negative lines in Sales Order
Entry using Manual Stock Codes for the discount amount rejected plus VAT. (£5.00 discount
+ £1.00 VAT in the original example)
Manual Stock Codes can be setup by changing the Stock Code to Manual in the General Tab
of the stock record.
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Any Credit Notes raised in this way should be raised using a terms code excluding
Settlement Discount. This can be amended in the change details screen of Sales Order
Entry.
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Once a credit is raised it should be matched against the balance on the original invoice via
the Cash Receipts program.
Credits Raised Against Invoices Created Prior to 1st April 2015
(Available in a later version of 131)
If a credit is required against an invoice raised with settlement prior to 1st April where reduced VAT
was calculated, providing the credit is issued via the Credit Note program, the system will check the
date of the original invoice and calculate the VAT and settlement based on this date.
This is to ensure that the credit matches the original invoice created.
However, this facility is not available if the credit is raised as a negative quantity via Sales Order
Processing as this routine has no link to the original order being credited, therefore the VAT and
discount on the credit will differ from the invoice raised.
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How To: How To - Account for Settlement Discount VAT
Rule Changes from April 2015
Purchase ledger
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A new field has been added to the Supplier record, under the Options tab, called Settlement
Credit Notes - If a Supplier is to issue a credit note for the value of the settlement discount
offered should you pay on time, this box should be ticked.
This is an allowable option offered by HMRC as a way of dealing with Settlement Discounts
and the VAT implications that arise.
The default for this field will be unticked.
 The Purchase Invoice Posting (PIP) and Purchase Ledger (PL) Journal screens have both been
changed so that the VAT calculation is different from earlier versions of Merlin.
 Previously, the VAT was calculated on the theoretical discounted goods amount assuming
VAT was chargeable at Standard Rate (20%) i.e. it assumed that your Supplier always
discounted the goods before the VAT charge was calculated, as Merlin did on Sales Invoices.
(The figures shown were as described in the Sales Ledger notes of this document.)
 As of Version 131, Merlin’s Purchase Ledger Invoice Posting and Purchase Journal will
assume VAT on the goods amount without discount. For example, an invoice total for
£120.00 will now assume a Net Goods Total of £100.00. At 5% Settlement Discount, Merlin
will calculate £6.00 on the Gross Invoice Total, as VAT is no longer assumed as discounted.
 The Settlement Discount calculated will be distributed as £5.00 goods and £1.00 VAT
adjustment on payment of the transaction ONLY within the settlement terms.
 The full Settlement Discount of £6.00 on the Gross Invoice total will be displayed within the
Suggested Payments routine. (As below)
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How To: How To - Account for Settlement Discount VAT
Rule Changes from April 2015
Suggested Payments Routine
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The Suggested Payments routine is used to suggest payments which are due for payment “as
at” a future date. It is also used to suggest where invoices should be paid early to take
advantage of Settlement Discount on offer for early payment.
Our records show that a number of our customers had requested specific modifications to
set their own rules for taking Settlement Discounts either on time, or after the expiry date of
the settlement discount. As of the 1st April we have chosen to standardise this routine to
ensure that Settlement Discounts can only be taken within settlement terms.
The decision to disallow Settlement Discount after the expiry of discount is based on the fact
that the Suggested Payment routine will now allow adjustments to VAT after a Settlement
Discount has been processed on time. This adjustment is required by law and it is not correct
to make this adjustment after the settlement terms have expired. Thus discount processing
after the expiry date of the terms is now disallowed.
On processing a payment run the Processing Type is usually set to run by “Due Date”.
The “Date” field directly below it is used to set the “Prospective Payment Date”. This is
normally a date in advance of the current date to allow sufficient time for processing of
queries and authorisation of payments totals by Management before the payment run is
finally processed.
When the Suggested Payment routine is run, the “Due Date” of each invoice is then used to
evaluate if the invoice is overdue as at the “Prospective Payment Date”. If the invoice is
overdue as at that point then the Suggested Payment routine will suggest the invoice is paid.
In addition to the basic logic of the Suggested Payment routine above, the routine has two
further options:
- Firstly, a tick box to “Take Discount”
- Secondly, a “Settlement Date” field
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How To: How To - Account for Settlement Discount VAT
Rule Changes from April 2015
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When the “Take Discount” box is checked, the “Settlement Date” is used to suggest
additional invoices which can be paid early to take Settlement Discount, where the discount
date has not expired.
NB each invoice for Suppliers offering Settlement discount has an additional Settlement
Discount Date, up to which point the discount is available to take.
If the “Take Discount” option is not chosen then these invoices will remain on the Purchase
Ledger until they are overdue, based on their “Due Date”, and the Suggested Payment
routine will then suggest they are paid without discount.
Additionally, if the invoice is suggested after the settlement date has expired, the “Amend
Payments” screen will not allow manual override of discount if the invoices settlement date
has expired. (NB the “Discount” field will be greyed out for expired items)
The Amend Payment screen now shows the Prospective Payment Date at the top of the
screen whilst amending payments so the criteria for allowable Settlement Discounts is clear
to see.
It now also shows the Settlement Credit Notes flag for the Supplier in the lower right hand
corner of the screen. (Labelled “Supplier Issues Credits”)
This flag can be overridden where necessary i.e. if a Supplier is mistakenly flagged during the
transitional period of users getting accustomed with the alterations in the legislation and
software.
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How To: How To - Account for Settlement Discount VAT
Rule Changes from April 2015
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On processing a Suggested Payment run to the Ledger, the “Run Date” is used to evaluate
the original “Prospective Payment Date” to check that the payment run is not being
processed after the “Prospective Payment Date” which was used to evaluate Settlement
Discount terms.
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Where invoices are found to have settlement terms which have now expired Merlin will
warn the user as to the number of invoices that have Settlement Discounts which have
expired and will not be taken.
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So as to avoid loss of work on the payment run, the first option, “YES” to Continue, will
process the payment run with the original allocations, but will leave the balance of the
settlement discounts as an outstanding balance on the Purchase Ledger. NB This may result
in a dispute with the Supplier and will only clear if either a further payment is made or the
Supplier chooses to issue an additional Credit outside the Terms of the Settlement discount.
If a Supplier is to issue a Credit Note for Settlement Discounts, (i.e. the Settlement Credit
Notes box is ticked against the Supplier) then the user should select payment of £114.00 and
enter the £6.00 discount, which is comprised of £5.00 discount off the goods and a VAT
element of £1.00. (The suggested Payment routine will make the allocations automatically if
the Invoice is within settlement terms)
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How To: How To - Account for Settlement Discount VAT
Rule Changes from April 2015
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On processing Payments against Suppliers issuing Credit Notes, Merlin will leave the detailed
transactions on the system showing a Total value of £120.00 and a Paid value of £114.00.
(Balance of £6.00)
The £6.00 outstanding balance on the Invoice will not appear on any other Suggested
Payment runs whilst awaiting the Supplier’s Credit Note, as the system compares the
outstanding amount on the Invoice against the Settlement Discount and appreciates that a
Credit Note is expected for all suppliers where the “Credit Note Sent” box is ticked.
NB this logic is also used for invoices paid after the “Prospective Payment Date” on
Supplier’s not issuing Credits.
When posting the Supplier Credit Notes onto your ledger, the balance (£6.00 in the original
example) should be split as £5.00 goods and £1.00 VAT and allocated to the part paid
Invoice, which will then show as fully paid, any Settlement Discount calculated for these
credit notes should be changed to zero.
If a Supplier is not set to issue Credit Notes then the postings described in the Sales Ledger
apply for settlement that is still in date - An adjustment occurs, crediting the £1.00 to the
VAT Nominal Account and inserting a record into the VAT Return Tables with an asterisk
suffixed to the original Invoice Number. The Cheque Register Journal will show the
adjustments made.
Credit Notes Received Against Invoices Prior to 1st April 2015
(Available in a Later Version of 131)
If a supplier sends a credit for an invoice raised prior to 1st April 2015 they may calculate VAT as per
the original Invoice or they may send a credit with VAT calculated under the new rules. To facilitate
this in the Purchase Journal program, when a transaction type of “Credit Note” is selected, the user
will be asked whether settlement has been calculated on the credit. If the answer is “Yes”, the credit
will be calculated under the new rules, if the answer is “No”, the credit will be calculated under the
old rules.
This question will be removed in later versions of Merlin as it is envisaged that credits for invoices
raised prior to April will have been received within a few months of the invoice date.
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How To: How To - Account for Settlement Discount VAT
Rule Changes from April 2015
Disputed Items
Transactions with settlement that have been disputed, which have gone past the settlement date
can be amended in the Customer and Supplier Transaction Display by right clicking on the item.
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The user will then be presented with an option to enter a new settlement date against the
invoice.
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For Supplier Invoices this new date will be used to evaluate the invoice in the next Purchase
Ledger Suggested payment run and evaluate the invoice in the Suggested Payments amend
payment screen.
We suggest that Merlin users offering this option to their customers consider a note in their
Terms & Conditions to this effect.
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