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VAT: Rules changing for refunds

27th Aug 2019
Independent VAT Consultant
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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).

Regulations amended

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.

Example 

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.

Timing

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.

Summary

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) [2019] 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.

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Replies (8)

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By nkwayne
28th Aug 2019 10:44

This seems to fly in the face of the tax point rules. Tax point is the earlier of:

Supply
Invoice
Payment

And I thought the invoice date was the 'issuing of the invoice' which I read somewhere was when you send the invoice to the customer.

So in the example given, the supply has taken place, the Credit note has been issued. The fact that refund (payment) has not taken place seems like the rules of the game have changed quite significantly. HMRC wants the tax when you issue an invoice (whether paid or not) but does not want to give back the tax when a credit note is issued.

Surely whether the refund has taken place is merely a civil debt as between supplier and customer.

Sigh.

More have your cake and eat it by HMRC...

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Replying to nkwayne:
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By jimeth
28th Aug 2019 11:54

I don't see any cause to object to this. It seems to be applying common sense to say that you can't reduce the price for VAT purposes only without actually refunding the customer. This does not change tax point rules - it merely prevents abuse.

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Replying to jimeth:
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By nkwayne
28th Aug 2019 12:22

I guess my objection is that its the wrong response to a perceived problem. I don't have the evidence that HMRC has used to decide that this is a genuine problem, but lets assume it is.

That means they have identified suppliers that have raised artificial documents, internal use only, to pay less tax.

Someone correct me if I am wrong, but that has all the hallmarks of tax evasion. That should not result in a change to the rules, it should result in the supplier going to jail, and their accountants being hauled over the coals for not filing an MLR report.

Yes this changes the tax point rule for a credit note. I have clients that have raised credit notes to regular but infrequent customers. That credit note stays on the account for months until the next sale and then is offset. The new rules say that offset = payment, so there is no problem, but now any credit note on an account has to not be accounted for as a reduction in output tax until that next sale.

Does your software do that? Mine doesn't.

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By happyface
28th Aug 2019 11:14

Can we clarify? Are we saying the original sales invoice of £100,000's amount must be received? Then a credit note to claim £8,000 input VAT can only be made when the builder refunds the agreed sum of £48,000? What happened when the original sales invoice of £100,000 monies has not been received and the credit note issued, straddiling 2 vat period? Does it mean that as there is no refund, there is no possibility of reclaiming the £8,000?

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Replying to happyface:
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By parksbookkeeping
28th Aug 2019 11:18

I was thinking the same thing!

Plus, it's surely going to make a difference depending upon the VAT scheme being used.

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By john hextall
28th Aug 2019 11:47

I'm sorry Neil, I don't understand this article. Are you saying that you can't get a VAT refund from a credit note, you actually have to refund the cash (once you have received it, of course) to be able to get that bit of VAT back? Or is there some deeper layer of complexity that the builder example fails to highlight?

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By [email protected]
28th Aug 2019 12:15

I sort of get the idea where the original Invoice has actually been paid before the credit note is issued - seems fair that the supplier is obliged to issue a refund...

However: In the normal course of a commercial relationship it is quite normal for an invoice to not be paid because a credit is due then when the credit note is raised, it is offset against the invoice and payment for the net amount is made.

The above article implies to me that the supplier would have to insist on payment in full and also issue a refund.

Only in the case of insolvency, and retail, IE where the customer cannot offset the credit note does this make sense

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By paul.benny
28th Aug 2019 14:34

This is bad writing and the advice confuses rather than clarifies.

Business brief 6/2019 makes clear that refunds include offset against an existing liability - which can include transactions other than the one being credited. Which is exactly what we all do when we issue credit notes.

This is essentially an anti-avoidance provision. There is no practical change for businesses which issue credit notes and account for the VAT thereon in a timely fashion - ie the vast majority of us.

Thanks (2)