VATSC06635 - Consideration: Change in consideration: Changes to Regulation 38 from 1 September 2019

Parts 3 and 5 of the VAT Regulations have been amended and affect the treatment of increases and decreases in consideration for supplies that have already taken place. The new rules apply from 1 September 2019.

When increases and decreases in consideration occur and when debit and credit notes must be issued

An ‘increase in consideration’ occurs when the change is agreed by both the supplier and the customer. The supplier must issue a debit note to reflect the change in price and they have 14 days from the date the increase in price is agreed with the customer to issue it.

A ‘decrease in consideration’ occurs when the supplier makes the refund to the customer or other person entitled to receive the payment. A credit note must be issued to the customer to reflect the decrease and the 14 day time limit for issuing this starts once the refund has been made to the customer.

Adjustments for decreases in consideration cannot be made unless there has been a ‘real world’ refund to the customer. So, decreases in consideration will only qualify for a VAT adjustment when there has been an actual refund in money by the supplier.

The 14 day window for issuing the appropriate documentation only commences when the supplier refunds the customer, so this gives businesses some control over when the time limit starts.

When to account for the increase or decrease in VAT

The supplier must account for the increase or decrease in VAT in the VAT period in which that increase/decrease occurs. For decreases in VAT, VAT registered customers must reduce the amount of VAT they have claimed by the same amount.

This ensures that customers receive the documentation that they need to make the consequential adjustments promptly, and that the VAT adjustments are accounted for in the VAT accounting period in which the price change actually takes place.

But 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.

If the increase or decrease in consideration takes place within the same VAT accounting period as the original transaction, the adjustment should be made in that same VAT period and is not a Regulation 38 adjustment.

What is meant by increase and decrease in price

Increases and decreases in price are any payments made in money.

In relation to a decrease in price, this includes an offset made by a supplier against a customer’s outstanding liability. For example, suppliers may offset a decrease in price against an outstanding debt. That may be a debt arising from an earlier transaction, or money owed as a result of the supply which is subject to a price reduction. For example, a hire purchase contract which is terminated before the customer has paid the full amount due.

This provision ensures that suppliers do not have to refund customers who have not paid in full for the supply while complying with the requirements for a Regulation 38 adjustment.

Debit and credit note content requirements

A debit 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 an increase in price
  • a description sufficient to identify the goods or services supplied
  • the amount of the increase in price excluding VAT
  • 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
  • the rate and the amount (expressed in sterling) of the VAT credited in respect of the decrease in price

It is a legal requirement that credit and debit notes contain the particulars outlined above. The practical effect of this is that in most cases:

  • the ability for customers to be able to issue a tax debit note instead of the supplier issuing a credit note has been removed; and
  • where an adjustment is made, suppliers must issue a credit or debit note and can no longer normally use other means to satisfy HMRC that the tax has been accounted for on the original supply.

However, the option for the supplier and customer to agree not to adjust VAT on credit notes will continue. As now, in circumstances where credit notes are issued without a VAT adjustment, it should state clearly that ‘This is not a credit note for VAT’.

Credit notes and debit notes in specific circumstances

No requirement for an invoice

Where a supplier is 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. If a request is made, the 14 day time limit starts on the day of the request. In these cases, the requirements for an identifying number and date of issue of the original invoice no longer apply.

Simplified invoice

Where simplified invoices are permitted in relation to the original supply, the supplier can issue simplified debit and credit notes to reflect a change in price.

Manufacturer refunds

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

Provisions to avoid double accounting

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 the 1 September 2019. This prevents the need for a second document to be issued where one has already been provided. 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 1st September 2019.

Self-billing

For businesses that use self-billing, Regulation 15C(8) of the VAT Regulations 1995 means that the supplier is not required to issue a credit note where a decrease in consideration occurs. This means that the self-biller can issue a credit note for the relevant decrease in consideration, as opposed to the supplier. This credit note should contain all of the required information as set out above.

Bad Debt Relief

There will be no change to the requirement for the records required in order to claim bad debt relief. Debit notes may be treated as invoices for the purposes of Bad Debt Relief.

Compliance checks from September

Suppliers may need to change their billing and accounting systems to accommodate the changes, for example, the requirement to quote the identifying number and date of issue of the VAT invoice to which the credit or debit notes refer. HMRC recognises that changes to systems may take time.