Beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

VAT Small and Medium Enterprises Assurance Manual

Challenge of selected purchases and importations: credits of input tax

  • when a supplier grants a tax credit to a registered customer, the effect should reduce the customer’s entitlement to input tax for the period in which they enter the adjustment into their business accounts;
  • there is an obvious risk in these circumstances that the customer may neglect, either accidentally or deliberately, to reduce the deductible input tax;
  • the VAT law does not require the suppliers to issue credit notes, so you should frame questions in such a way as to identify situations, which should have resulted in the raising of credit notes;
  • credit notes are not always clearly marked as such and have often been processed erroneously as purchase invoices, resulting in a double error;
  • when there is collusion a supplier may deliberately overcharge tax and issue credits which are deducted from output tax, but which the customer suppresses from input records;
  • the risk is enhanced when suppliers and registered customers are associated, or where self-billing is involved;
  • credits (often written in red ink or entered in parentheses) may appear in the body of the Purchase Day Book (PDB) or other input records, at the end of each month’s or quarter’s entries, or they may be posted to an entirely separate record;
  • to confirm whether input tax credits have been correctly and fully posted and whether the input tax figure in the VAT account has been properly adjusted, inward credit notes should be examined and compared with the PDB, and any other records kept for this purpose e.g. returns outward book;
  • when the supplier in lieu of credit notes issues amended invoices, particular care should be taken to ensure that the trader has properly adjusted the input tax entitlement, rather than claiming both invoices in full;
  • purchase ledger accounts, suppliers’ statements, and the general ledger should be examined to ensure as far as possible that all credits received are accounted for;
  • correspondence with suppliers and other parties, copies of letters of complaint issued etc. may provide an indication that unrecorded credits have been received. This correspondence forms part of the supplementary business records, although the trader may be reluctant to produce documents he considers are of a confidential nature; and
  • contingency or other rebates may have been received, or prices may have been adjusted downward on completion of contract work.