HMRC has recently issued guidance explaining the changes to the accounting rules for adjustments to VAT when there are increases or reductions in the price of goods or services; and the adjustment takes place in a period after that in which the VAT was originally declared on the supply. The new rules will take effect on 1 September 2019.
The prices that businesses charge for goods and services can be reduced after VAT has been accounted for on a supply. An example is when a business delivers goods, some of which are faulty, and it agrees with its customer that the price should be reduced. Businesses may also increase the price of a supply, for example, when more work is required to complete a task than was originally anticipated.
The current rules do not impose a time limit for making VAT adjustments when price adjustments are made. UK VAT law requires 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 believes there is evidence that some businesses are trying to use the current law 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.
The new rules will restrict adjustment to situations where a refund is materially made to the customer. They will also clarify when and how VAT adjustments must be made.
Specifically, 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 and 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 and a supplier must account for the decrease in the VAT period in which it takes place. VAT-registered customers 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.
- Additionally, rules regarding the content of the relevant accounting documents (credit and debit notes), and a requirement that they materially be provided to the customers, are being introduced. Required data includes an identifying number; the date of issue; the names, addresses and registration numbers of the parties ; the identifying number and date of issue of the VAT invoice or invoices relating to the supply for which there is a change 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.
- Impacted businesses will find their record-keeping obligations to be more cumbersome. It is important that they ensure their ERP systems are set up to issue credit notes which display all the details which will now be required.
- 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.