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HMRC internal manual

VAT Supply and Consideration

Consideration: Change in consideration: Law

EU Law

Directive 2006/112, Article 90

  1. In the case of cancellation, refusal or total or partial non payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.

 

UK Law

VAT Act 1994, Schedule 11

2(10)     Regulations under this paragraph may make provision—

 (b)       with respect to the making of entries in accounts for the purpose of making adjustments, whether for the correction of errors or otherwise;

 

UK Regulations

VAT regulations 1995, Regulation 38

38 Adjustments in the course of business

(1)     …3 This regulation applies where—

(a)     there is an increase in consideration for a supply, or

(b)     there is a decrease in consideration for a supply,

which includes an amount of VAT and the increase or decrease occurs after the end of the prescribed accounting period in which the original supply took place.

(1C)     Where an increase or decrease in consideration relates to a supply in respect of which it is for the recipient, on the supplier’s behalf, to account for and pay the tax, the prescribed accounting period referred to in paragraph (1) is that of the recipient, and not the maker, of the supply.

But this paragraph does not apply to the circumstances referred to in regulation 38A.

 

(2)        Where this regulation applies, both the taxable person who makes the supply and a taxable person who receives the supply shall adjust their respective VAT accounts in accordance with the provisions of this regulation.

 

(3)     Subject to paragraph (3A) below, the maker of the supply shall—

(a)     in the case of an increase in consideration, make a positive entry; or

(b)     in the case of a decrease in consideration, make a negative entry,

for the relevant amount of VAT in the VAT payable portion of his VAT account.

 

(3A)     Where an increase or decrease in consideration relates to a supply on which the VAT has been accounted for and paid by the recipient of the supply, any entry required to be made under paragraph (3) shall be made in the recipient’s VAT account and not that of the supplier.

 

(4)     The recipient of the supply, if he is a taxable person, shall—

(a)     in the case of an increase in consideration, make a positive entry; or

(b)     in the case of a decrease in consideration, make a negative entry,

for the relevant amount of VAT in the VAT allowable portion of his VAT account.

 

(5)     Every entry required by this regulation shall, except where paragraph (6) below applies, be made in that part of the VAT account which relates to the prescribed accounting period in which the increase or decrease is given effect in the business accounts of the relevant taxable person.

 

(6)     Any entry required by this regulation to be made in the VAT account of an insolvent person shall be made in that part of the VAT account which relates to the prescribed accounting period in which the supply was made or received.

 

(7)     None of the circumstances to which this regulation applies is to be regarded as giving rise to any application of regulations 34 and 35.

 

VAT regulations 1995, Regulation 38ZA

(1)  Where—

(a) there is a decrease in consideration for a supply of goods which includes an amount of VAT and the decrease occurs after the end of the prescribed accounting period in which the original supply took place,

(b) the supply is the final supply in a chain of supplies made by taxable persons which relates to the same goods,

(c) the decrease in consideration is as a result of a relevant payment (which may form part of a larger payment that includes an element of compensation) that reduces the taxable amount which serves as a basis for determination of the VAT payable by the first supplier, and

(d) the amount of the relevant payment equates to the whole, or a proportion, of the price paid for the goods by the final consumer to the final supplier and does not exceed the amount so paid,

then, in regulation 38(2), the reference to “the taxable person who makes the supply” shall include a reference to the first supplier and the reference to “a taxable person who receives the supply” shall include a reference to a final consumer who is a taxable person.

 

(2) In this regulation—

“cash refund” includes a payment made by cheque or equivalent but does not include the provision of a face-value voucher falling within Schedule 10A to the Act or a voucher falling within Schedule 10B to the Act;

“final consumer” means the recipient of the supply referred to in paragraph (1)(b);

“final supplier” means the person who makes the supply referred to in paragraph (1)(b);

“first supplier” means the first person in the chain of supplies that ends with the final consumer;

“relevant payment” means—

(a) a cash refund made by the first supplier direct to the final consumer—

(i)to reflect the reduced value (including a reduction to nil) of goods which are faulty, damaged or otherwise do not fully meet expectations of the final consumer,

(ii)as a result of a product recall, or

(iii)in accordance with the terms of a sales promotion scheme operated by the first supplier under the terms of which the final consumer is required to provide proof of purchase of specified goods to the first supplier; or

(b) a reimbursement made by the first supplier direct to the final supplier—

(i)which equates to the redemption value of a money-off coupon issued by the first supplier and used by the final consumer in part payment for goods purchased from the final supplier, or

(ii)to redeem a money-off coupon issued by the first supplier in any of the circumstances specified in sub-paragraph (a)(i) or (ii) and used by the final consumer in full or part payment for goods purchased from the final supplier.

 

(3) Where the rate of VAT applicable to the supply made by the first supplier differs from the rate of VAT applicable to the supply made by the final supplier, the adjustment made by the first supplier shall be at the rate of VAT applied by the final supplier.”