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HMRC internal manual

VAT Traders’ Records Manual

Credit and Debit notes: Regulation 38 - Increase/decrease in consideration

Regulation 38 of the VAT Regulations 1995 (SI 1995/2518) requires businesses to adjust their VAT account, where there has been a change in the value of the underlying consideration in relation on which VAT is due, and a corresponding change in the amount of VAT charged.

In these circumstances, the legislation places a clear obligation on the parties to adjust their VAT account. Such changes will normally be evidenced by a credit note, debit note, or document having the same effect (see VATREC13060). An increase or decrease in consideration includes:

  • goods supplied under a hire-purchase, conditional sale or lease-purchase agreement, being returned to, or re-possessed by, the supplier;
  • customers qualifying for a contingent discount;
  • goods supplied being found defective, and a reduced price being negotiated
  • an agreed reduction in the consideration for goods or services.

VATREC13100 lists situations in which credit notes are issued as a matter of commercial practice, but which do not involve an increase or decrease in consideration.