Accounting for VAT adjustments when prices change

HMRC has updated the accounting rules for adjustments to VAT when there are increases or reductions in the price of goods or services, set to come into effect in September

The measure is designed to crack down on potential abuse of the regulations which has been happening as the current rules do not impose a time limit for making VAT adjustments when price adjustments are made. Regardless of this, it is a requirement that the VAT must be adjusted.

Price adjustments may occur long after goods or services have been supplied. Regulation 38 of the regulations applies to cases where the price change occurs after the supplier has already accounted for the output tax on the original supply in a VAT return.

HMRC says there is evidence that some businesses are trying to use the current regulations to gain a tax advantage by making VAT adjustments for reductions in price without refunding their customers.

Some businesses also incorrectly attempt to treat errors as price adjustments for the purpose of avoiding the relevant time limits. HMRC says regulation 38 of VAT Regulations 1995 cannot be used in these circumstances, as there is a separate procedure for error corrections, which are limited to four years following the time of the original sale.

There has been litigation on this topic, with HMRC noting that recent court decisions support its view of how the law applies.

The revised rules are intended to put it beyond doubt that regulation 38 may only be used to reduce the amount of VAT paid to HMRC when a refund is actually made. They will also clarify when and how VAT adjustments must be made.

Under the new policy, part 3 and part 5 of the VAT Regulations will be amended.

Under the new rules, the time an increase in price occurs is when the change is agreed by both the supplier and the customer – a debit note must be issued no later than 14 days after the price increase – the supplier must account for the increase in VAT in the VAT period in which the change occurs.

A decrease in price occurs when a supplier makes a refund to a customer, or other person entitled to receive the payment – a supplier has 14 days to issue a credit note from the time the decrease occurs – a supplier must account for the decrease in the VAT period in which it takes place – a VAT-registered customer must reduce the amount of VAT it has claimed by the same amount, this does not prevent a supplier issuing credit notes in advance of refunds being made, but ensures that it is issued no later than 14 days after the payment.

A payment in relation to a decrease in price is defined as any payment in money. It also includes an offset made against an existing liability. For example, a supplier may offset a decrease in price against an outstanding debt. That may be a debt arising from an earlier transaction, or money owed against a sale which is the subject of a price reduction. Examples include a hire purchase contract which is terminated before the customer has paid the full amount due.

The changes also include new debit and credit note content requirements.

A debit note must now contain an identifying number; the date of issue; the name, address and registration number of the supplier; the name and address of the customer; the identifying number and date of issue of the VAT invoice or invoices relating to the supply for which there is an increase in price; a description sufficient to identify the goods or services supplied; the amount of the increase in price excluding VAT; and the rate and the amount (expressed in sterling) of the VAT chargeable in respect of the increase in price.

A credit note must contain an identifying number; the date of issue; the name, address and registration number of the supplier; the name and address of the customer; the identifying number and date of issue of the VAT invoice or invoices relating to the supply for which there is a decrease in price; a description sufficient to identify the goods or services supplied; the amount of the decrease in price excluding VAT; and the rate and the amount (expressed in sterling) of the VAT credited in respect of the decrease in price.

Where a supplier was not required to provide an invoice for a sale, for example, retailers selling to private individuals, there is no requirement to provide a debit or credit note, unless the customer is VAT registered and requests one.

In cases where simplified invoices were permitted in relation to the original supply, the new rules provide for simplified debit and credit notes.

Where a decrease in price is covered by regulation 38ZA of the regulations (refunds made by a first supplier of goods to a final consumer in a chain of supplies) a credit note is not required unless the final consumer requests one. In such a case, the manufacturer or importer must provide one within 14 days of the request being made.

Existing guidance explaining that where both the supplier and customer are fully taxable, and agree not to adjust the VAT they have accounted for on a transaction following a price reduction, and no credit note need be issued, will still apply.

The 14-day time limit for issuing a debit note starts from the date the change in price is agreed with the customer.

For a credit note, the 14-day limit starts from the date the refund payment is made to the customer.

If a business fails to issue a debit note or credit note within the time limit, or fails to make the required accounting entries in time, this is an error which must be corrected under the normal rules.

To avoid double accounting, HMRC says the requirement to provide a debit note or credit note does not apply in cases where an equivalent document has been provided by the supplier to the customer prior to 1 September 2019. This will prevent the need for a second document to be issued where one has already been provided before the new rules started.

Also, the requirement to make any adjustment for a change in price does not apply in cases where an adjustment has already been made under regulation 38 before 1 September 2019.

Revenue and Customs Brief 6 (2019): changes in accounting for VAT after prices are altered

Pat Sweet | 22-07-2019

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