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HMRC internal manual

VAT Refunds

From
HM Revenue & Customs
Updated
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Unjust enrichment: What is 'Pass on'

If the claimant’s customers (consumers) bear the economic burden of some, or all, of the wrongly charged VAT, that VAT is said to have been ‘passed on’ to the customer (consumer). 

When VAT is first applied to a supply of goods or services, the supplier has three main options:

  • He can bear the entire economic burden of the tax by not increasing the selling price.

For example, in the absence of VAT a retailer sells an item for £100. If, when he charges VAT, the retailer bears the whole of the VAT (assuming a VAT rate of 17.5%) the price is maintained at £100, but the retailer would receive only £85.11 [£85.11 + 17.5 % = £100].

  • He can pass on the entire economic burden of the tax by increasing his price.

For example, in the absence of VAT a retailer sells an item for £100. If, when he charges VAT, the retailer passes on the whole of the VAT (assuming a VAT rate of 17.5%) to his customers (consumers), the price rises by 17.5% to £117.50 and the retailer continues to receive £100 after tax.

  • He can absorb part of the economic burden of the tax and pass on the balance to his customers (consumers).

For example, in the absence of VAT a retailer sells an item for £100. If the retailer passes on half of the VAT and the customer (consumer) bears the other half (assuming a VAT rate of 17.5%) the price rises from £100 to £108.04 and the retailer receives £91.95 [£91.95 + 17.5% = £108.04].

It is important to note that, in all of these examples, the retailer will have invoiced, and accounted for VAT at £17.50 and it will always have constitute 17.5% of the VAT exclusive price. In other words, the fact that a VAT charge is shown on an invoice does not necessarily mean that the economic burden of the tax has been passed on. We cannot use a VAT invoice as evidence that the burden of the VAT has been passed on.