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HMRC internal manual

VAT Refunds

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Four year cap - other provisions: Regulation 38 - Increase and reductions in consideration: Operation of time limits

There is no time limit in Regulation 38 itself because there can be no limit imposed on the time that passes between the date on which a supply is made and the date on which the consideration for it can be changed. However, there is a limit on the time within which the failure to reflect a change in consideration can be corrected.

That time limit is imposed by Section 80(4) of the VAT Act 1994 and regulation 34(1A) of the VAT Regulations 1995.

The Tribunal decision in General Motors Acceptance Corporation (UK) Plc (GMAC) (VAT Tribunal Decision 17990; LON/01/242; [2007] BVC 2302) concluded that the regulation 38(1A) time limit has no effect where a genuine reduction in consideration takes place more than three years after the original supply. The Tribunal held that this time limit is incompatible with the directly effective provisions in Article 11C.1 of the Sixth Directive - see also VAT Information Sheet 06/2003.

The Tribunal chairman (Tribunal president Stephen Oliver QC) concluded at paragraph 65 of his decision:

“Here the “condition” imposed by rule 38(1A) is concerned neither with the procedures for making the claim nor with the evidence required to support it. Properly understood, the three year “cap” as imposed by rule 38(1A) is not a condition at all. It is a blanket limitation which has the effect of ousting the taxable person’s basic right to be taxed on the consideration received by him and no more. As such, the three year limitation on making the claim by reference to the time when the original supply is made is incompatible with Article 11 generally and with GMAC’s rights under Article 11C.1 in particular. Rule 38(1A) [of the VAT Regulations 1995] has rendered ineffective GMAC’s right to relief. On that basis therefore we think that GMAC is entitled to rely on its Community law rights; and to the extent that the Commissioners’ decision seeks to deny GMAC those rights, the decision is wrong. Our conclusion on the three year limitation issue is therefore in favour of GMAC.”

The practical effect of the Tribunal ruling is that regulation 38(1A) is of no effect. The time limit cannot be counted from the date on which the original supply was made but from the end of the accounting period in which the change to the consideration for that supply was given effect in the business records.

Regulation 38 requires that, where the consideration for a supply is increased or reduced after the supply was made and VAT accounted for on the original consideration, the person who made the supply must issue debit notes or credit notes, as appropriate, to the customer and reflect the change in consideration in the VAT return for the accounting period in which the increase or reduction was given effect in the business accounts.

If the supplier fails to make the adjustment in the appropriate vat return, that return contains an error in that he has either overdeclared or underdeclared his true output tax liability.

For example,

Ali Ltd supplies televisions to the general public. In 1992, as a sales promotion campaign, it sells its televisions at £100 each (of which £15 is output tax) but undertakes to refund £50 to the buyer if he comes back in ten years time with his receipt. Mr Banda returns to the shop on 21 June 2002 with his receipt and Ali Ltd pays him his £50. Ali Ltd is now required to reduced its output tax liability in the return for the quarter ending on 30 June 2002 by £7.50. If it doesn’t, that return contains an overdeclaration of output tax and is ‘in error’. The remedy is for the company to make a claim under Section 80 of the VAT Act 1994 to recover it - see the decision of the VAT & Duties Tribunal in General Motors Acceptance Corporation (UK) Plc (VAT Tribunal Decision 19989)

If the consideration is increased and the company fails to make the adjustment in the VAT return, the result will be that the return contains an underdeclaration of output tax and we will be entitled to make an assessment under Section 73 of the VAT Act 1994 to recover that underdeclared output tax.