Policy paper

Revenue and Customs Brief 6 (2019): changes in accounting for VAT after prices are altered

Published 17 July 2019

1. Purpose of this brief

This brief explains HMRC’s new rules from 1 September 2019 for adjustments to VAT following increases or reductions in the price of goods or services.

2. Readership

Businesses that make adjustments to the price of goods or services and their business customers.

3. Background

The prices businesses charge for goods and services can be reduced after VAT has been accounted for on a supply. An example is 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. Under the VAT Regulations 1995 (‘the Regulations’), 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 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 Regulations and the VAT Act 1994.

In cases where an increase or decrease in price takes place within the same VAT accounting period as the original transaction, no adjustment under Regulation 38 is required, as the price change is accounted for in that same VAT period.

4. Reason for the change

There is evidence that some businesses are trying to use the current Regulations to gain a tax advantage by making VAT adjustments for reductions in price without refunding their customers.

Some businesses also incorrectly attempt to treat errors as price adjustments for the purpose of avoiding the relevant time limits. Regulation 38 cannot be used in these circumstances. Instead the error correction procedure explained in How to correct VAT errors and make adjustments or claims (VAT Notice 700/45) should be used. These error corrections are limited to 4 years following the time of the original sale.

There is litigation on this topic. Recent court decisions support HMRC’s view of how the law applies. The revised rules will however put it beyond doubt that Regulation 38 may only be used to reduce the amount of VAT paid to HMRC when a refund is actually made. They will also clarify when and how VAT adjustments must be made.

5. New policy

Part 3 and Part 5 of the VAT Regulations (which include Regulation 38) will be amended.

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

Definition of payment

A payment in relation to a decrease in price is any payment in money. It also includes an offset made against an existing liability.

For example, a supplier may offset a decrease in price against an outstanding debt. That may be a debt arising from an earlier transaction, or money owed against a sale which is the subject of a price reduction. For example, a hire purchase contract which is terminated before the customer has paid the full amount due.

New debit and credit note content requirements

A debit note must contain:

• an identifying number
• the date of issue
• the name, address and registration number of the supplier
• the name and address of the customer
• the identifying number and date of issue of the VAT invoice or invoices relating to the supply for which there is an increase in price
• a description sufficient to identify the goods or services supplied
• the amount of the increase in price excluding VAT
• the rate and the amount (expressed in sterling) of the VAT chargeable in respect of the increase in price

A credit note must contain:

• an identifying number
• the date of issue
• the name, address and registration number of the supplier
• the name and address of the customer
• the identifying number and date of issue of the VAT invoice or invoices relating to the supply for which there is a decrease in price
• a description sufficient to identify the goods or services supplied
• the amount of the decrease in price excluding VAT
• the rate and the amount (expressed in sterling) of the VAT credited in respect of the decrease in price

Where a supplier was not required to provide an invoice for a sale, for example, retailers selling to private individuals, there is no requirement to provide a debit or credit note, unless the customer is VAT registered and requests one.

In cases where simplified invoices were permitted in relation to the original supply, the new rules provide for simplified debit and credit notes.

Where a decrease in price is covered by Regulation 38ZA of the Regulations (refunds made by a first supplier of goods to a final consumer in a chain of supplies) a credit note is not required unless the final consumer requests one. In which case, the manufacturer or importer must provide one within 14 days of the request being made.

The VAT guide (VAT Notice 700) section 18 explains that where both the supplier and customer are fully taxable, and agree not to adjust the VAT they have accounted for on a transaction following a price reduction, no credit note need be issued, this will still apply.

Time limits

A 14-day time limit for issuing a:

• debit note starts from the date the change in price is agreed with the customer
• credit note starts from the date the refund payment is made to the customer

If a business fails to issue a debit note or credit note within the time limit, or fails to make the required accounting entries in time, this is an error which must be corrected under the normal rules.

Provisions to avoid double accounting

The requirement to provide a debit note or credit note does not apply in cases where an equivalent document has been provided by the supplier to the customer prior to 1 September 2019. This will prevent the need for a second document to be issued where one has already been provided before the new rules started. Also, the requirement to make any adjustment for a change in price does not apply in cases where an adjustment has already been made under Regulation 38 before 1 September 2019.

6. Guidance

VAT notices and HMRC’s guidance manuals will be amended to reflect the new rules for 1 September 2019.