VATSC06610 - Consideration: Change in consideration: Background

The law requires that the amount of VAT collected by HMRC on a supply cannot be greater than (nor less than) that due on the total amount paid by the final consumer. If a consumer receives a refund or reimbursement of the purchase price then the total amount paid by them will be reduced and the VAT previously accounted for must be adjusted accordingly.

The UK legislated for this requirement through The Value Added Tax (Accounting and Records) Regulations 1989 (SI 1989/2248), Regulation 7 with effect from 1 January 1990. This is now in The Value Added Tax Regulations 1995 (SI1995/2518) Regulation 38. Prior to 1 January 1990 there was no UK legislative basis for making a post-supply adjustment to consideration.

Regulation 38 has been amended from time to time, as follows:

38(1A) and (1B) added a cap on when an adjustment could be made relative to the time of the original supply, but this was repealed: see VATREC13090

38(1C) extended the provision to cover a person who accounted for VAT under a reverse-charge: see VATREC13080

38A extended the provisions to cover MTIC traders

38ZA modifies 38(2) to include refunds and reimbursements by manufactures to consumers: see VATSC06660

38(4A) introduced a requirement for the recipient of the supply to hold a debit note before an entry can be made in their VAT account: see VATSC06635

38(5) has been amended to make it clear that entries must be made in the prescribed accounting period in which the increase or decrease takes place: see VATSC06635

When the latest set of amendments were made to Regulation 38 on 1 September 2019, amendments were also made to other regulations to ensure that Regulation 38 worked effectively:

15C introduced a time limit for debit and credit notes as well as specifying what those documents must contain: see VATSC06635

24A inserted new definitions of ‘increase in consideration’ and ‘decrease in consideration’: see VATSC06635

24B explains when increases in consideration and decreases in consideration occur: see VATSC06635

24C provides a definition of payment, which includes offsets made against an existing liability: see VATSC06635

This guidance explains the circumstances where HMRC accepts there has been a change in the value of the consideration for a supply to which Regulation 38 can apply.

Additional guidance

VAT Registration & Accounting Policy (VRAP) Team has operational responsibility for Policy on Regulation 38 adjustments, credit notes and traders’ records. Additional Guidance can be found in VATREC which explains the mechanics of accounting for an adjustment

VAT Principles Team is responsible for Policy on supply, consideration, and bad debt relief. Regulation 38 adjustments should not be confused with Bad Debt Relief; guidance on this can be found in VATBDR.