VATF34730 - What to consider prior to determining whether to use an intervention: applying VAT basics: other basic matters to consider: credit notes and adjustments
Introduction
Taxable persons have a right to deduct input tax incurred on goods or services that form a cost component of their taxable supplies only if certain conditions are met. A requirement is that there has actually been a supply of goods or services by and to them (VATF34200 and VATF34500).
Credit notes
A credit note is issued to correct a genuine mistake or overcharge or an agreed reduction in the value of a supply. According to Notice 700 it must be issued within one month of the error being discovered or agreed and give value to the customer, that is, represent a genuine entitlement (or claim) on the part of the customer for the amount overcharged either to be refunded or offset against the value of future supplies.
Adjustments to VAT returns
Adjustments made to VAT returns follow the normal rules, as set out in Notice 700/45 - How to correct errors and make adjustments or claims. In order to decide whether or not an adjustment is correct it is necessary to determine why it was made.
In order to correctly determine how credit notes and adjustments should be treated you will find below a set of examples.
Examples
Taxable person states that the supply for VAT purposes to him did not take place
If a taxable person notifies HMRC that the supply of goods did not take place and will not take place then he loses his right to deduct the associated input tax. The taxable person thus is withdrawing his claim to that input tax. If credit notes have been raised then this will not suffice to amend the input tax claim and the taxable person should also amend his VAT return and VAT records accordingly.
To avoid any doubt, confirmation should be sought from the taxable person in writing that no supply of goods took place nor will it take place and that he is withdrawing his claim to the input tax.
Taxable person states that the supply for VAT purposes by him has been cancelled
The taxable person has stated that he wishes to cancel or has cancelled the transaction(s).
As well as the accounting adjustments the taxable person must evidence that effect has been given to the transaction. For example, whether the goods have been physically returned to the UK and are in the possession of the taxable person. If this has happened it is then important to determine whether title passed from the taxable person to the customer (this usually happens when payment is made/received).
If title passed from the taxable person to his customer and the customer returned the goods, then the return of the goods constitutes a second supply from the customer back to the taxable person. If title did not pass from the taxable person to the customer then there was no supply of goods (VATF34300).
To avoid any doubt, clarification should be sought from the taxable person in writing whether the goods have been physically returned, are in his possession, and whether he is withdrawing his claim to the input tax.
Action to take
Action to be taken in relation to the above can be found in the VAT Assessments and Error Correction Manual.
Questions regarding tax declared on an invoice are dealt with in VATF34720.