Prompt Payment Discounts (PPD) - Update The rule about how to account for VAT when offering PPD (also known as cash or early settlement discounts) changed on 1st April 2015. Latest news from AAT For AQ2016 the new rule will be assessed from 1 st September 2016 For AQ2013 from 1 st September to 31 st December you can choose: An assessment assessing Early Settlement Discount (ESD) which AAT are referring to as the old method An assessment assessing Prompt Payment Discount (PPD) which covers the new legislation When you book your assessment, you need to tell the assessment venue which method you wish to be assessed on! PLEASE check that the right assessment has been scheduled using the key code document before you open the assessment. NEW LEGISLATION VAT is calculated on the goods total Under the new rules the invoice is raised in exactly the same way as any other invoice. Example: the customer has purchased goods for 100 plus VAT so the supplier raises the invoice as follows: Goods total 100 VAT at 20% 20 Amount due for payment 120 The supplier is offering 5% discount ( 5 = 100 x 5%) for payment within 7 days. The customer wants to take advantage of the discount so under the new rule, they will pay VAT on the consideration (money) actual paid. VAT is paid on the consideration (money) paid The customer will issue a payment for 114. Goods total 95 VAT at 20% 19 Amount to be paid 114 It s essential that the customer remembers to reduce the VAT so it reflects the amount paid. The customer cannot simply deduct 5 from 120 and pay 115.
Let s look at the transactions as they will be recorded in the sales ledger control account and the customer s account: SDB* (Invoice) 120 Bank 114 *SDB - Sales day book. You can see that there is a difference of 6 that we still need to account for. HMRC require you to evidence the reduction in consideration (receipt). You can do this in one of two ways. Method 1 - Issue a credit note The credit note will be prepared as follows: Goods total discount 5 VAT at 20% 1 Total amount of discount 6 Now let s look at how that will appear in the sales ledger control account and the customer s account: SDB (invoice) 120 Bank DADB* (credit note) 114 6 120 120 *DADB - discounts allowed day book Now we have accounted for the full value of the original invoice by recording the payment received and the credit note issued. We are assuming that this is AAT s preferred method of assessment as they mention day books for discounts in AQ2016 assessment criteria, so it s expected that you will record the credit note issued for any customer discounts in a discounts allowed day book. Remember a day book is a primary accounting record, and is simply a list of credit notes issued for discounts taken, similar to the other day books you ve learnt about. Let s look at the fuller picture i.e. all the double entry overleaf.
Step one: the invoice is issued to the customer SDB (invoice) 120 DR Sales Account CR SBD (invoice) 100 DR VAT Account CR SBD (invoice) 20 Step two: the payment is received SDB (invoice) 120 Bank 114 DR Bank Account CR SLCA (receipt) 114
Step three: the credit note is created and issued to account for the discount SDB (invoice) 120 Bank DADB (credit note) 114 6 120 120 DR Discounts allowed CR DADB (credit note) 5 DR VAT Account CR DADB (credit note) 1 SBD (invoice) 20 You need to take care that you don t forget that issuing a credit note is a way to account for the discount, we are NOT recording sales returns. It could be an easy mistake to make as you re used to processing credit notes through the sales returns account. Effect on the cashbook (bank) As we are now accounting for discounts allowed or received in a discounts allowed or received day book we no longer record them in the cashbook so there will be no discounts column. Remember: we are assuming that this will be the AAT s preferred method of assessment as the assessment criteria specifically mentions day books for discounts. Publishers have indicated that this is AAT s preferred method. Method 2 overleaf
Method 2 HMRC allow businesses to adjust the output tax in their VAT return if they do not wish to issue credit notes. If they choose to do this then they must state on the invoice: a) The terms of the PPD (in particular the time by which the discounted price must be paid). b) A statement that the customer can only recover the VAT paid to the supplier as input tax. As most businesses who are registered for VAT use computerised accounting systems, it s unlikely that this method will be adopted. It s essential that a business considers the VAT accounting scheme they are on, and the way that their particular software processes transactions to ensure their VAT return accurately reflects the amount of VAT to be declared or reclaimed. You learn about VAT and VAT returns in detail at level 3 within the Indirect Tax unit on an AAT qualification so this method is unlikely to be assessed at level 2.