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HMRC internal manual

VAT Small and Medium Enterprises Assurance Manual

HM Revenue & Customs
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Supplementary or alternative checks: credits of output tax

  • there are many circumstances in which a registered trader may have found it necessary to allow a credit to a customer. (See Notice 700 The VAT Guide Section 18 and V1-24A Trader’s records Section 3);
  • it is important that registered suppliers maintain proper records of credits allowed to customers. This is not only to ensure the accuracy of their own tax returns, but also to enable a check to be made that registered customers have reduced their input tax deductions by the amounts of any tax credits received;
  • selected copy credit notes should be examined to ensure that they contain the information prescribed in Notice 700 Section 18;
  • in cases where amended invoices have been issued they must be clearly marked ‘credit note’;
  • officers should satisfy themselves that any tax credits issued are genuine, and select a few items, particularly any involving substantial amounts of tax, to check that output tax on the original supply was properly brought to account;
  • particular attention should be given to examining credits between associated businesses, since these are often manipulated in pursuit of a cash flow advantage. Where associated companies have different staggers, this is a particularly likely occurrence and care should be taken to ensure that both the supply and the credit are genuine;
  • when extensive credits of output tax are granted the trader’s records should be examined. The officer should normally compare the record from which postings to the VAT account are made with a sequence of outward credit notes, with sales ledger accounts, and with return inwards books or other supporting documentation;
  • officers should bear in mind the possibility of fraud, involving completely false credits. In any case of suspicion or serious doubt, the validity of the output credits recorded should be checked by the issue of “urgent” references to the Risk Team covering the LVOs for the customers concerned;
  • when numerous credits involving substantial tax have been granted to a registered customer, and especially if the supplier and customer are associated a sequence of credits, a reference should be issued to the customer to confirm reduction of input tax claimed;
  • when a trader has overcharged tax on an invoice to a customer, the total of output tax in the VAT account must be adjusted, but only to the extent that the customer is allowed a credit for the tax previously overcharged. When identifiable goods are taken back as being unsuitable, or defective, the officer is occasionally to verify disposal and confirm that, when appropriate, tax has been accounted for;
  • overseas traders not registered for VAT in the UK may be able to reclaim VAT incurred in the UK under the mutual aid procedures. See VROBP Refunds to overseas business persons for further details. There is a potential revenue risk when credit notes showing VAT are raised in respect of such supplies. Officers should notify the VAT Overseas Repayments Unit in Londonderry on VAT 453 of all such cancelled transactions, which come to their notice; and
  • beware credit notes, which appear to have been artificially created in order to obtain premature bad debt relief. In this case you may well find correspondence, statements, etc. to the customer demanding payment in the records, but little or no material from the customer. A genuine credit, on the other hand, is more likely to be backed up with correspondence from the customer demanding a refund, and payment may already be recorded if goods have failed subsequent to supply.