Contractors' Questions: How to offer a prompt payment discount?
Contractor’s Question: I’ve read about prompt payment discounts when it comes to VAT but didn’t know about this incentive before. How can I offer a prompt payment discount; what are the tax implications and wouldn’t I lose money if all clients took me up on the offer?
Expert’s Answer: Given that legislation is soon to change, this is somewhat a moot point from a tax perspective. From April 2015, you’ll have to pay the appropriate amount of VAT on income received from clients, regardless of whether that includes a prompt payment discount or not.
As for offering a prompt payment discount, that’s a commercial decision for you to decide as a business owner. The advantage is that you’re providing an incentive for early payment, which may help with cash flow - which is particularly useful when it comes to paying suppliers or employees.
Bear in mind that you’ll probably need to offer a reasonable discount for it to act as a suitable incentive. But by doing so, as you’ve quite rightly pointed out, you’ll be taking a financial hit.
You could, of course, increase your pre-discount prices but then you run the risk of appearing uncompetitive. However some businesses embrace early payment discounts as a marketing tool: they’ll overinflate their prices significantly, then offer an aggressive discount (30%+) for early payment, but again you’ll need to evaluate if this is appropriate for your business.
As regards applying a prompt payment discount, it can be as simple as adding the discount as a single line on your invoice, which could state that the discount applies only if the invoice is settled by a given date.
But do keep in mind what you’re trying to achieve. If you have a problem with late payments would it not be cheaper and more effective for you just to pick up the phone and chase the payment? Best of luck with however you choose to proceed.
The expert was James Poyser, co-founder of inniAccounts, an online accountancy firm for contractors.