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HMRC internal manual

Business Income Manual

Specific receipts: refunds of sums paid as VAT: what if the original VAT-paying customer is refunded?

This is direct tax guidance; for indirect tax guidance, refer to VAT Guidance.

VAT is a transaction-based tax. In some cases, when a trader receives a refund of a sum paid as VAT, they are able to identify the party who was the original customer to the particular transaction. The trader may decide to pass an appropriate amount on to that original customer. This payment is an allowable deduction for the trader. As a result the trader is only taxable on the net amount of the refund that they retain.

The original customer is taxable on the sum paid on to them, if they were able to deduct the original expenditure. The refund is an adjustment to an allowable trading expense, see BIM40166.


A Ltd provides landscaping services to property developers. Following the decision in Rialto Homes plc VTD 16340, their major customer, B Plc suggest that A Ltd lodge a claim for a refund of sums wrongly paid as VAT.

In September 2010, A Ltd receives a refund of £250,000 and agrees to pass £150,000 on to B Plc, the VAT in respect of work carried out by A Ltd for B Plc.

The directors of A Ltd recognise the receipt of £250,000 in the accounts for the year ended 31 December 2010, together with a deduction for the £150,000 paid on to B Plc. The balance of £100,000 forms part of the taxable profits of A Ltd.

B Plc had not been able to deduct the VAT on the original expenditure on landscaping because the VAT rules do not allow this. The landscaping costs had therefore been included on a VAT inclusive basis. The £150,000 is recognised in calculating the taxable profits of B Plc in their year ended 31 March 2011, see BIM40166. The accounts for the earlier year are not re-opened.