We have a large newish customer who has told us that they take 5% automatic settlement discount on all purchase invoices. We told them we would prepare invoices to take account of this which would state that the VAT claimed should be restricted to the amount actually paid. They said they were not happy with this. We suggested issuing them with credit notes to account for the difference. They didn't like this either. They told us that their suppliers all made their own internal adjustments to account for the discount. We ended up agreeing to manage the discounts via a retrospective discount, which solves all the VAT questions. But am I right in thinking that they are effectively overclaiming VAT and that this is potentially fraudulent?
We're not going to continue supplying them, so this is academic for us, I think. But I would be very interested to know the answer, especially as this is a high-profile business which courts publicity.