VAT on customer prepayments, and whether the VAT element can be used to credit future actual invoices
I have a quick question regarding VAT on customer prepayments, and whether the VAT element can be used to credit future actual invoices so the customer has to part with less cash.
If a customer prepaid £100 + VAT (£120) and an invoice was raised accordingly, but during the month used £200 + VAT (£240) worth of services, and an invoice was raised for £200 + VAT (£240), would the customer be obliged to pay a difference of:
A) £120 (so the full prepayment of £100 + VAT (£120) can be deducted from the actual invoice)
B) £140 (so only £100, and not the VAT element can be deducted from the actual invoice)
Option A obviously means the customer would part with less cash, and is certainly more attractive.
The reason we do things this way is because we ask for prepayments on an as/when basis from less credit-worthy customers but for ease of accounting, we'd like each customer (regardless of whether they are making prepayments) to receive an end of month actual usage invoice.
Thanks in advance.