HMRC have announced new rules from 1 September 2019 for how to handle UK VAT if the price changes. How do you deal with VAT adjustments if prices are decreased or increased?
Price adjustments can occur a long time after VAT has been declared on the associated supply and the rules in the past did not impose a time limit for making VAT adjustments for any price changes.
This has led to some businesses using the previous drafting of VAT Regulation 38 to gain a tax advantage by making VAT adjustments for reductions in price but not paying the reduction across to the customer. HMRC took issue with this situation leading to the Upper Tier Tribunal recently dismissing an appeal against the First Tier’s decision in the case of Inventive Tax Strategies Limited (In Liquidation) & Ord v R & C Commrs [2019] UKUT 0221.
The cause of the change
The four companies involved in the appeal (‘Appellants’) sold tax avoidance schemes where part of the contractual arrangement was to refund fees if the scheme failed. The schemes did in fact fail which caused the Appellants to go into liquidation. Credit notes were issued to the customers and the Appellants posted VAT credits to their VAT accounts but did not make any refunds to the customers.
The FTT decision was that in order for the taxable value to be reduced there had to be a transfer back to the customer of monies received and a contractual obligation to repay in isolation of a refund was not sufficient.
How to handle UK VAT if the Price Changes
Under the new rules from 01 September 2019 – A decrease in price occurs against which VAT can be credited when a supplier makes a refund to a customer. They have 14 days to issue a credit note from the time the decrease occurs and must account for the VAT credit in the period covered by the date the decrease has occurred.
Where there is an increase in price; the time of the change is agreed by both supplier and customer then a debit note must be issued within 14 days of the price increase. The supplier must account for the increase in VAT in the period covered by the date the change occurs and the VAT registered customer must reduce the amount of input VAT it has claimed by the same amount.
Please get in touch if you’re ever not sure about anyting to do with UK VAT – sooner is always better!