Credit and Debit notes: Principles established in case law
Prior to 1989 when the VAT Accounting and Records Regulations (now incorporated into the VAT Regulations 1995) were made, the policy on credit notes developed in line with a number of tribunal decisions. The significant ones being:
- British United Shoe Machinery Company Ltd (1977 VATTR p187)
- Silvermere Golf and Equestrian Centre Ltd (1981 VATTR p 106)
- Robin Seamon Brindley Macro (MAN/83/100).
These decisions established the principles that to be effective for VAT purposes a credit note (or document having similar effect) must:
- be issued to the customer
- correct a genuine mistake or overcharge
- reflect an agreed reduction in the value of a supply
- give value to the customer
- not be issued for a bad debt
- be issued in good faith.
Since 1989, tribunals have continued to apply these principles, other key cases being:
Highsize Ltd (LON 90/945) Customs issued an assessment to recover input tax for an invoice for which the supplier had purportedly issued a subsequent credit note. The tribunal found that Highsize had never received the credit note in question and allowed the appeal. This case was further complicated because there was a dispute between the parties over the underlying supply and the department had told the supplier to issue the credit note.
Kwik Fit (GB) Ltd (1992 VATTR p427) The customer entered into a contract with Kwik Fit that was a binding obligation to repay the price of returned baby seats, if specific conditions were met. The tribunal found that this meant that the credit note had the effect of cancelling the original tax invoice and hence the ‘supply’ under Section 2(1) VAT Act 1994.
McMasters Stores (EDN 93/213) Credit notes issued where an election to tax rents was found to be invalid - the notes did not comply with Regulation 38 and overpaid tax was correctly repayable under Section 80 of the VAT Act 1994.
British Telecommunications plc (LON/95/3145) established that a credit note or similar document has to be issued before the VAT account can be adjusted in line with Regulation 38.
The Robinson Group of Companies Ltd (MAN/97/348) Credit notes were issued for supplies of bottled mineral water subsequently found to be zero-rated. The tribunal found that the consideration for the supplies did not include an amount of VAT and a Regulation 38 adjustment was therefore not available. Overpaid tax was recoverable under Section 80 of the VAT Act 1994, subject to the unjust enrichment test.
General Motors Acceptance Corporation UK Ltd (GMAC)(LON/01/242) tribunal and subsequent High Court case confirmed that the evidence of a change in consideration does not have to be in the usual form of a credit note but can be ‘any other document having the same effect’ (Regulation 24, VAT Regulations 1995).
For the purposes of Regulation 24 where the customer is not VAT registered, such a ‘document’ does not have to be physically issued by the supplier, but a record must exist in the supplier’s business accounts, which:
- evidences the change in consideration;
- records acceptance by supplier and customer that the event triggering the change has occurred; and
- taken on its own, or with other documents/records, must indicate the change in price and the associated VAT.
John Copson (MAN/94/833 (VTD 13335)), concerned a failure to adjust records at the time of receipt of a credit note and whether the taxpayer had the ability to correct the error at a later date.
The tribunal said the following:
“These Regulations [now regulations 34 and 38 of the VAT Regulations 1995 (S.I.1995/2518)] cannot give the Appellant the right to process credit notes as and when he chooses. He must act in good faith and the duty upon any taxpayer must be to process documents such as credit notes as and when they are received. However, equally any taxpayer can make a mistake and this is clearly provided for by Regulation . If the Appellant deliberately ignored the credit notes and withheld making the adjustments in his accounts he cannot be allowed to rely on Regulation . If however, the Appellant acted honestly and the omission to process the credit notes and adjust his records was an honest error, I believe he should be allowed to rely on that Regulation”.