VATSC06680 - Consideration: Change in consideration: Regulation 38ZA: Historic ‘cash back’ arrangements

Prior to 1 March 2007, provided:

  • manufacturers have not reduced their output tax;
  • recipients have not reduced their input tax, and;
  • both parties have agreed to make no adjustments for the past, present and future

HMRC do not require adjustments to be made in these circumstances, will not assess for over-claimed input tax, and will consider withdrawing any such assessments that have already been raised, subject to the usual three year limitation.

If manufacturers break the agreement, change their minds at a later date, and do adjust their output tax, HMRC will assess recipients in line with assessment time limits. Conversely, where manufacturers have already adjusted their output tax and recipients have failed to adjust their input tax, HMRC will assess for over-claimed input tax, or defend assessments already issued.

In practice, where a manufacturer has not made a claim to reduce their output tax in respect to any ‘cash back’ payments made prior to 1 March 2007, HMRC would assume an agreement between the parties. If however a manufacturer subsequently makes a claim for periods prior to 1 March 2007, HMRC continue to reserve the right to take action in respect to any failure to adjust input tax by the recipient.

A recipient of a ‘cash back’ payment prior to 1 March 2007 remains responsible for identifying if there is a need to reduce their input tax. In cases of doubt they must determine the VAT treatment applied by the manufacturer and apply the guidance given.

Between 1 March 2007 and the 1 April 2014, businesses should correctly make the necessary adjustments as outlined in VAT Notice 700/7. Businesses providing ‘cash backs’ are entitled to reduce their output tax provided that they charged and accounted for VAT on their original supply.

If you are VAT registered and you receive a ‘cash back’, this reduces the taxable value of your purchase, and you must reduce your input tax accordingly. HMRC will assess for over-claimed input tax where these adjustments are not made.

Any ‘cash back’ payment from manufacturer to customer, that does not affect the wholesaler, does not require the wholesaler to make any VAT adjustment.