Changes to the way companies calculate the VAT on invoices that are subject to Prompt Payment Discounts could effectively rule them out as a way of encouraging clients to pay early.

Until now, businesses have been allowed to calculate VAT based on the discounted invoice price, and display this on their communications with customers.

If the customer fails to pay in time to benefit from the Prompt Payment Discount, the business has been able to charge the full invoice amount, without having to recalculate the VAT.

But this is due to change - from April 1st 2015, the VAT shown on the invoice should be based on the full amount, and if the customer pays early enough to gain a Prompt Payment Discount, the VAT should be recalculated.

This not only increases the admin time taken up, but also means the customer must receive a credit note for the excess VAT they have paid or, in the worst case scenario, their original payment must be refunded in full and a new invoice issued to reflect the lower amount of VAT chargeable.

Chris Hayward, managing director of the National Merchant Buying Society, is urging those in his industry to make their voices heard, even though the official consultation period passed by almost unnoticed.

"The time period for responding to the consultation period may well have passed; however, in view of the huge administrative burden that could be placed on UK businesses for what will have no Exchequer impact, then following the initial response from HMRC and any published guidelines, the key players in the industry - both Nationals and Independents - may have to jointly consider the best ways of making our major industry concerns heard by the government," he said.

However, the opportunity to do this may have already passed, as the formal consultation period on the changes was only open between June 17th and September 9th 2014, and HMRC are now analysing feedback.

Alternatives to Prompt Payment Discounts

The problem with Prompt Payment Discounts is that, in many cases, you are giving money-off to customers who would have paid on time and in full anyway, and may be seeing little benefit in terms of encouraging late payers to settle up earlier.

It may actually cost you money overall, and it can be hard to determine exactly what positive or negative impact the practice is having - so what else can you try?

Charitable donations are one option, whereby you give a fixed amount, or an amount scalable based on the client's invoice, to a stated charity in return for prompt payment.

This is a good way to improve your brand perception, as giving lump sums to charity makes for better PR than simply offering customers a negligible discount on their invoices.

It also taps into customers' altruistic side, and while many might not pay early in order to satisfy their own financial interests, you could find more are willing to do so in aid of a good cause.

Depending on your particular area of business, there may even be benefits in terms of tax breaks and other incentives for donating to charity, whatever your reasons for doing so.

Risk and Reward

Finally - and it is always worth stressing this again - remember you should not treat late payers as the norm and prompt payers as the exception.

Paying bills on time should be the default position for customers unless they absolutely cannot make the payment, in which case you should expect them to contact you promptly with an explanation and an offer of alternative payment - for example, by instalments.

By all means reward your customers who pay promptly, and particularly those who pay on the day the invoice is issued, but don't be held to ransom by late payers and non-payers.

There is now a whole library's worth of legislation enacted to give you the tools to pursue and even punish late payment - never be afraid to bring the full force of the law down on those clients and customers who seem to think they are out of its reach.

Image "Pudsey Bear!" by flickr user Adam Wyles

is licensed under CC BY 2.0