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HMRC internal manual

VAT Single Market

HM Revenue & Customs
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Particular types of transaction: goods returned or rejected by the customer (including free of charge replacements)

Contract cancelled

Cancellation of a contract may result in goods that have already been dispatched being returned to the supplier. Where they are returned to a UK supplier any VAT accounted for on a supply to a non-VAT registered EC customer may be adjusted accordingly. No adjustment will be appropriate for what would have been a zero-rated intra-EC supply, as VAT will not have been accounted for in the first place.

If a VAT registered UK business returns goods to a supplier in another Member State, they will in practice only need to make a corresponding adjustment to any acquisition VAT already accounted for in cases where input tax recovery was restricted - for example if they are partly exempt.

Rejected goods

Where goods are rejected by a UK customer on delivery, the customer remains liable to account for acquisition tax as they have acquired the goods, but equally they remain entitled to the corresponding input tax deduction. They have no liability to account for tax on any subsequent alternative disposal of the goods in the UK by the supplier.

If they are disposed of in the UK (for example they are resold to another UK customer), the supplier will not normally be required to register for VAT unless transactions in these circumstances amount to a continuing business activity here.

Replacement goods

Goods that are returned to the supplier following rejection as not being in accordance with contract, or because they are found to be faulty within the guarantee or warranty period, may be replaced with different goods.

Neither the return of the original goods, or the sending of replacements, produces additional intra-EC supplies or acquisitions where the supplier or customer is in the UK. These movements are therefore not recorded on the UK VAT return. However, the value of the goods is required to be reported for Intrastat purposes both when goods are returned and when they are replaced.