HMRC have published Brief 6 (2019), which explains changes to the rules on accounting for VAT, where the amount paid changes after the VAT has been accounted for to HMRC from 1 September 2019.
The prices businesses charge for goods and services can be reduced after VAT has been accounted for on a supply, for example 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. The VAT rules specify that, where this happens, 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 VAT 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 statutory provisions.
HMRC state they have seen evidence that some businesses are trying to use the current VAT rules to gain a tax advantage by making VAT adjustments for reductions in price without refunding their customers. There is litigation on this topic and recent court decisions support HMRC’s view of how the law applies.
To put the matter beyond doubt, the VAT Regulations are being amended to the effect that Regulation 38 may only be used to reduce the amount of VAT paid to HMRC when a refund is actually made. Revised rules will also clarify when and how VAT adjustments must be made.
Broadly, 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.
For further information, see HMRC Brief 6 (2019) here.