VATSC06630 - Consideration: Change in consideration: Regulation 38

Regulation 38 requires businesses to adjust their VAT account where there has been a change in the value of the consideration for a supply of goods or services and a corresponding change in the amount of VAT charged. The regulation refers explicitly to a change in consideration between a person who makes the supply and the person who receives the supply and not a transaction between a supplier and an unconnected consumer further down the supply chain.

The change in value can happen many years after the original supply, for example, when a business fails to deliver goods or perform services and the price is reduced or cancelled.

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. Regulation 38 applies when the price paid for a supply changes at a later date so it covers both increases and decreases in the value of a supply. It can only be used where there is an agreed change in the value of consideration between the parties to a transaction, for example:

  • goods supplied under a hire-purchase, conditional sale or lease-purchase agreement, being returned to the supplier;
  • customers qualifying for a contingent discount;
  • goods supplied being found defective, and a reduced price being negotiated

If the change in consideration takes place in the same VAT period as the original supply then the adjustment will be made in that same VAT period before any VAT has been accounted for to HMRC and so is not a Regulation 38 adjustment.

VATBDR2500 explains that Regulation 38 may be used where goods supplied under hire purchase agreements, or similar, are repossessed, and the value of the supply made has been altered but:

  • Regulation 38 can’t be used to adjust for default and unpaid amounts; these are subject to the bad debt relief rules VATBDR3600.
  • Regulation 38 cannot be used as an error correction mechanism or where no supply has taken place (see VATREC13100).

Guidance in VATREC13000 explains how any adjustment should be accounted for by the supplier and by the customer, where they are VAT registered.