Whether supplies are goods or services: Returned goods
When goods are sold to a customer, title to the goods passes immediately to the new owner unless either the goods are sold under a conditional sale, Romalpa agreement or on hire purchase, or the contract for the supply is not fulfilled. If the goods are later returned to the supplier for any reason the treatment of the act of returning the goods depends on whether title to the goods has changed hands or not. This results in the following three situations:
- goods returned because they are not in accordance with the sales contract
- goods returned where title has passed
- goods returned where title has not passed.
Goods returned because they are not in accordance with the sales contract
A transaction may be voided if the goods are returned because they are faulty or, in some other way, not in accordance with the contract, for example not suitable for a purpose specified. In this situation, the transfer of title is cancelled and neither the original sale of or unsatisfactory goods, nor their return is a supply. If the goods are replaced without further charge, this is strictly speaking a new supply. However, it is common practice, usually acceptable, for the original invoice to remain unaltered.
If the faulty or unsatisfactory goods are repaired or improved for the customer and the work is performed in order to meet the original contract, the work is part of that original supply. There is therefore only one supply.
Goods returned where title has passed
If goods are returned after title has passed, title will pass back to the supplier and a second supply is made.
Goods returned where title has not passed
The situation where goods are bought under a conditional, Romalpa or hire purchase arrangement is described in VATSC04200.