Settlement discounts

A settlement discount is where a business offers another business a discount when they pay an invoice early.

This is usually a percentage discount if an invoice is paid within a specified number of days, for example, a 5% discount for invoices paid within 15 days.

When an invoice that contains settlement discount is paid within the settlement discount period, the VAT is only charged on the discounted invoice amount.

For compliance, you must:

• Tell customers that the discount is available and the amount they are due to pay
• Issue an invoice detailing the full net and VAT payable
• Issue a credit note to account for the VAT discount if the invoice is paid within the discount period

Record a settlement discount

1. Record the invoice at the full value.

When a prompt payment is received, create a credit note for the discounted amount. This should include a Net and VAT element.

2. Allocate against the invoice and credit note together.
3. Record the invoice payment against the invoice.