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HMRC internal manual

VAT Traders’ Records Manual

Credit and Debit notes: Dealing with problem cases: Scenario 2

Credit note raised by supplier but not issued to the VAT registered customer (i.e. only output VAT adjusted).

Tax liability reduced but no credit note raised.

Supplier failed to issue a credit note to notify a VAT registered customer of reduction in consideration. Again, you will need to find out the underlying supply position. If there has been a genuine decrease in consideration for the supply, a credit note must be issued to a VAT registered customer. If the customer is not registered there is no requirement to issue a credit note but you need to check the documentation/records of the supplier in accordance with the GMAC decision.

If output tax has been reduced in the absence of such a document, a VAT34 penalty warning letter should be issued to the supplier to notify of a breach of the VAT Regulatory Provisions. This will also inform them that a penalty may arise under section 69 of the VAT Act 1994 should they not rectify the matter.

However, subject to capping, the adjustment will be correct and no assessment action necessary if enquiries reveal that:

  • an invoiced supply did not take place; or
  • the VAT on the original invoice was under or over-stated in error.
  • No credit note was required because the supplier did not issue a VAT invoice for the original supply (Regulation 15C (8)).

In these circumstances ensure that the customer has not claimed input tax. If input tax has been claimed the customer should be assessed if they have not made an adjustment.