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VAT: Briefing on manufacturers’ ‘cash back’ payments

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7th Feb 2007
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HMRC have just published a Brief to explains the VAT treatment of ‘cash backs’ and what businesses should do if they pay or receive ‘cash backs’, or have paid or received them in the past. This follows rulings by the European Court of Justice in Elida Gibbs (C-317/94) and Commission v Germany (C-427/98).

HMRC’s policy is set out in VAT Notice 700/7 Business Promotion Schemes Section 7.5, which states that manufacturers are entitled to reduce the output tax on their sales in respect of the ‘cash backs’, provided that they charged and accounted for VAT on their original supply. If you are VAT-registered and you receive a ‘cash back’ that relates to a taxable supply, this reduces the taxable value of your purchase, and you must reduce your input tax in the proportion in which you claimed it.

Until 1 March 2007, providing:

  • manufacturers have not reduced their output tax, and
  • recipients have not reduced their input tax, and
  • both parties have agreed to make no adjustments for the past, present and future,

HMRC will not require adjustments to be made in these circumstances, will not assess for over-claimed input tax, and will consider withdrawing any such assessments that have already been raised, subject to the usual three year limitation.

If manufacturers break the agreement or change their minds at a later date, and do adjust their output tax, HMRC will assess recipients in line with assessment time limits. Where manufacturers have already adjusted their output tax and recipients have failed to adjust their input tax, HMRC will assess for over-claimed input tax, or defend assessments already issued.

In practice, where a manufacturer has not made a claim to reduce their output tax in respect to any ‘cash back’ payments made prior to 1 March 2007, HMRC would assume an agreement between the parties. If however a manufacturer subsequently makes a claim for periods prior to 1 March 2007, HMRC continue to reserve the right to take action in respect to any failure to adjust input tax by the recipient.

A recipient of a ‘cash back’ payment prior to 1 March 2007 remains responsible for identifying if there is a need to reduce their input tax. In cases of doubt they must determine the VAT treatment applied by the manufacturer and apply the guidance given.

From 1 March 2007, businesses should correctly make the necessary adjustments as outlined above.

Where ‘cash backs’ are paid between businesses in different EU member states (MS), no VAT adjustments should be made.

Source: HMRC Brief 08/07

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