Revenue and Customs Brief 6 (2019) - changes in accounting for VAT after prices are altered
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Published 17 July 2019
1. Purpose
of this brief
This brief explains HMRC’s new rules from 1 September 2019 for
adjustments to VAT following increases or reductions in the price of
goods or services.
2. Readership
Businesses that make adjustments to the price of goods or services
and their business customers.
3. Background
The prices businesses charge for goods and services can be reduced
after VAT has been accounted for on a supply. An example is when a
business delivers goods, some of which are faulty, and it agrees with
its customer that the price should be reduced.
When this occurs a business normally sends its customer a credit
note and gives a refund. Under the VAT Regulations 1995 (‘the
Regulations’), the suppliers must reduce their output tax, and
their
VAT-registered customers must adjust their input tax.
Businesses may also increase the price of a supply, for example,
when more work is required to complete a task than was originally
anticipated. In these cases, businesses normally issue debit notes for
the increased amount and account for the additional VAT. Their
VAT-registered customers may then recover the additional input tax,
subject to the normal rules.
Price adjustments may occur long after goods or services have been
supplied. Regulation 38 of the Regulations applies to cases where the
price change occurs after the supplier has already accounted for the
output tax on the original supply in a VAT Return.
The current rules do not impose a time limit for making VAT
adjustments when price adjustments are made, but it is a requirement
that the VAT must be adjusted. Failure to do so is an error which must
be corrected in accordance with requirements, and within time limits
set out in the Regulations and the VAT Act 1994.
In cases where an increase or decrease in price takes place within
the same VAT accounting period as the original transaction, no
adjustment under Regulation 38 is required, as the price change is
accounted for in that same VAT period.
4. Reason for the change
There is evidence that some businesses are trying to use the current
Regulations to gain a tax advantage by making VAT adjustments for
reductions in price without refunding their customers.
Some businesses also incorrectly attempt to treat errors as price
adjustments for the purpose of avoiding the relevant time limits.
Regulation 38 cannot be used in these circumstances. Instead the error
correction procedure explained in How
to correct VAT errors and make adjustments or claims (VAT Notice
700/45)
should be used. These error corrections are limited to 4 years
following the time of the original sale.
There is litigation on this topic. Recent court decisions support
HMRC’s view of how the law applies. The revised rules will
however put
it beyond doubt that Regulation 38 may only be used to reduce the
amount of VAT paid to HMRC when a refund is actually made. They will
also clarify when and how VAT adjustments must be made.
5. New policy
Part 3 and Part 5 of the VAT Regulations (which include Regulation
38) will be amended.
Under the new rules:
- the time an increase in price occurs is when the change is agreed
by both the supplier and the customer – a debit note must be
issued no
later than 14 days after the price increase – the supplier must
account
for the increase in VAT in the VAT period in which the change occurs
- a decrease in price occurs when a supplier makes a refund to a
customer, or other person entitled to receive the payment – a
supplier
has 14 days to issue a credit note from the time the decrease occurs
–
a supplier must account for the decrease in the VAT period in which it
takes place – a VAT-registered customer must reduce the amount of
VAT
it has claimed by the same amount, this does not prevent a supplier
issuing credit notes in advance of refunds being made, but ensures that
it is issued no later than 14 days after the payment
Definition of payment
A payment in relation to a decrease in price is any payment in
money. It also includes an offset made against an existing liability.
For example, a supplier may offset a decrease in price against an
outstanding debt. That may be a debt arising from an earlier
transaction, or money owed against a sale which is the subject of a
price reduction. For example, a hire purchase contract which is
terminated before the customer has paid the full amount due.
New debit and
credit note content requirements
A debit note must contain:
- an identifying number
- the date of issue
- the name, address and registration number of the supplier
- the name and address of the customer
- the identifying number and date of issue of the VAT invoice or
invoices relating to the supply for which there is an increase in price
- a description sufficient to identify the goods or services
supplied
- the amount of the increase in price excluding VAT
- the rate and the amount (expressed in sterling) of the VAT
chargeable in respect of the increase in price
A credit note must contain:
- an identifying number
- the date of issue
- the name, address and registration number of the supplier
- the name and address of the customer
- the identifying number and date of issue of the VAT invoice or
invoices relating to the supply for which there is a decrease in price
- a description sufficient to identify the goods or services
supplied
- the amount of the decrease in price excluding VAT
- the rate and the amount (expressed in sterling) of the VAT
credited in respect of the decrease in price
Where a supplier was not required to provide an invoice for a sale,
for example, retailers selling to private individuals, there is no
requirement to provide a debit or credit note, unless the customer is
VAT registered and requests one.
In cases where simplified invoices were permitted in relation to the
original supply, the new rules provide for simplified debit and credit
notes.
Where a decrease in price is covered by Regulation 38ZA of the
Regulations (refunds made by a first supplier of goods to a final
consumer in a chain of supplies) a credit note is not required unless
the final consumer requests one. In which case, the manufacturer or
importer must provide one within 14 days of the request being made.
The VAT
guide (VAT Notice 700) section 18 explains that where both the
supplier and customer are fully taxable, and agree not to adjust the
VAT they have accounted for on a transaction following a price
reduction, no credit note need be issued, this will still apply.
Time limits
A 14-day time limit for issuing a:
- debit note starts from the date the change in price is agreed
with the customer
- credit note starts from the date the refund payment is made to
the customer
If a business fails to issue a debit note or credit note within the
time limit, or fails to make the required accounting entries in time,
this is an error which must be corrected under the normal
rules.
Provisions to avoid
double accounting
The requirement to provide a debit note or credit note does not
apply in cases where an equivalent document has been provided by the
supplier to the customer prior to 1 September 2019. This will prevent
the need for a second document to be issued where one has already been
provided before the new rules started. Also, the requirement to make
any adjustment for a change in price does not apply in cases where an
adjustment has already been made under Regulation 38 before 1 September
2019.
6. Guidance
VAT notices and HMRC’s guidance manuals will be amended to
reflect
the new rules for 1 September 2019.
About the Author
© Crown Copyright 2019.
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for educational / informational purposes only. Article reproduced by
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Article Published/Sorted/Amended on Scopulus 2019-07-17 23:00:00 in Tax Articles
