I've had several examples where we have need to raise invoices or credit notes to recharge costs and I'm never sure whether VAT is required. Is it linked to whether VAT was initially incurred?
For example, we need to reimburse a customer for some freight costs they incurred to rectify an issue. This was to be done by raising a credit note on their account. The freight costs they incurred did not have VAT on them. Should my credit note to them have had VAT on it?
Another example is we are paying a customer £250 for advertising our brand in their brochure. We have been asked to raise a credit note on their account to cover this. Should this credit note have VAT on it?
Thanks in advance
Caroline
Replies (12)
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Ask them to invoice you as they are the supplier (certainly in the second case)...
As usual with VAT, first ask who is supplying what to whom...
OK then send them a cheque or bank transfer for the agreed amount and let them worry about it...
Oh well, it's not like I've got anything better to do.
In scenario 1, you say that a customer has incurred freight costs as a result of some issue. Presumably, there has been some previous supply by your organisation to the customer?
Your organisation has agreed to reimburse the costs that they have incurred (presumably the cost inclusive of any irrecoverable VAT, but since they haven't been charged VAT, the net cost is the same thing).
If you did this as a cash payment, it is likely to be compensation with there being no supply.
By issuing a credit note, you are adjusting the consideration for your supply, so the amount of the reimbursement credit note should bear VAT (assuming the customer could recover the original input tax on your supply) at the same rate as the original supply.
In scenario 2, your customer is making a supply to you of advertising, and they should raise a frigging invoice (VATable) for it, with there then being a contra between your purchase ledger and sales ledger accounts for the customer. A credit note seems inappropriate.
Thanks, Portia - for saving me the time. Pretty much word for word - including the 'f' word - what I would have said.
One question - again to save me the time of looking for myself - is the customer's ability to recover input VAT relevant to whether or not a credit note should carry VAT? (I thought the reverse to your suggestion applied - namely that if both parties are fully taxable they can agree that the credit note is ex-VAT, with no need to adjust either VAT account.)
No, but say the cost to be reimbursed is £120, and assume the originally service was standard-rated. If the customer could recover the original input VAT, then the credit note is for £120 + 24 VAT, and the customer accounts for the £24 to HMRC, keeping. If they could not recover the input VAT, then the credit note should be for £100 + £20 VAT, and the customer keeps all of the £120.
To be fair to the customer.
You may be correct that if they're both fully taxable, they could do it without any VAT adjustment. I can't remember either!