VAT: Rules changing for refunds
The VAT rules are being tightened up from 1 September 2019 to stop a business making a price reduction to gain a VAT advantage without refunding customers, writes Neil Warren.
VAT in the UK is now 46 years old but there are still some basic flaws in our VAT system that occasionally need sorting out with a change in the law.
One such change is happening from 1 September 2019 relating to VAT adjustments that are made when prices change.
The new measure is aimed at ensuring that the regulations cannot be abused by only allowing VAT to be adjusted on a VAT return if the price is reduced when refunds are actually made to customers.
The detail of this change is found in Revenue and Customs Brief 6(2019).
Regulation 38 of the 1995 VAT Regulations deals with situations where a business has charged and declared output tax on a supply of goods or services, but then the price subsequently changes in the future.
In practical terms, only a reduction in price movement could potentially trigger a tax advantage. The R&C Brief 6/2019 addresses these issues by making amendments to Part 3 and Part 5 of the regulations.
A builder does some work for a client and charges £100,000 plus VAT as an advance fee. However, the job goes wrong and the builder agrees to reduce the price to £60,000 plus VAT, issuing a credit note (with a current date) for £40,000 plus VAT.
The new regulations make it very clear that he can only reduce the output tax on his VAT return by £8,000 if he makes an actual refund of £48,000 (including VAT) to the customer or any other person entitled to receive the payment.
Also, the customer (if he is VAT registered and able to claim input tax) is only obliged to reduce his input tax if he receives the refund.
A supplier has 14 days to issue a credit note from the date that the refund is made, which must be adjusted in the same VAT period in which the refund is given or received.
In the case of upward price movements, the supplier must issue a debit note within 14 days of when the change is agreed with the customer.
The failure to issue a debit or credit note within these time limits is a mistake that needs to be corrected under the error correction procedures (see VAT Notice 700/45).
No VAT adjustment for some credit notes
An opportunity that is sometimes forgotten is that VAT does not need to be adjusted on a credit note if both the supplier and customer agree to this outcome.
This will only be relevant where the customer is fully taxable, ie the VAT on the original invoice was claimed as input tax and was not a cost to the customer. That outcome is still available with the new procedures (see VAT Notice 700, para 18.2.1)
Finally, Regulation 38 does not apply when the price is adjusted in the same VAT period as the original VAT was declared.
The aim of the new rules is to stop a business making a price reduction to gain a VAT advantage without refunding customers. See my article VAT: Common sense prevails over credit notes about the Upper Tribunal decision in the case of Inventive Tax Strategies Ltd (In Liquidation)  UKUT0221.
The new rules “put it beyond doubt” that Regulation 38 can only be used to reduce VAT paid to HMRC when a refund is actually made.