VATSC06670 - Consideration: Change in consideration: Regulation 38ZA accounting

Manufacturer

HMRC do not prescribe the records that a manufacturer should maintain, but they should be sufficient to enable HMRC to verify that the VAT credit has been correctly claimed. As the refund is outside the direct supply chain credit notes should not be issued.

Examples are;

  • correspondence between the final consumer and the manufacturer prior to a refund being agreed
  • documentary evidence provided by the final consumer to evidence the validity and the amount of his or her claim such as a copy of the invoice showing the price paid
  • money-off coupons and details of payments to retailers in respect of business promotions.

When an adjustment is required, a manufacturer should adjust its VAT account by crediting the output tax side.

Consumer

The provisions of Regulation 38ZA only apply to final consumers who are VAT registered and have claimed some or all of the input tax incurred on the purchase of the goods as input tax.

Any business in this position that receives a refund payment, must adjust its input tax claim accordingly.

Where an adjustment is required, a VAT registered final consumer must adjust its VAT account by debiting the Input tax side.

Retailers and others in the supply chain

Where the “relevant payment” is a cash refund the retailer or other intermediary play no part in the refund arrangements and there is no VAT adjustment for them to make.

In the case of a reimbursement then there is a payment to the retailer or other intermediary which will require that intermediary to adjust their VAT account.

Vouchers

The section deals with the accounting consequences for all parties when the manufacturer gives the consumer a voucher which can be used by the consumer to get further goods from a retailer. The treatment will depend on whether the voucher is a single purpose or a multi-purpose one.

Single Purpose Voucher

We consider that for there to be a single purpose voucher the voucher should be redeemable for a very narrow range of goods of broadly similar characteristics and of the same VAT liability. That is the voucher can only be used by the consumer for specific goods and the voucher itself represents the supply of goods for which it is redeemable. In this case the consideration paid for the goods is made when the voucher is redeemed by the retailer for reimbursement by the manufacturer. Thus the supply of the goods is made by the retailer to the manufacturer in return for the consideration reimbursement by the manufacturer to the retailer. There is no supply to the consumer in this scenario.

The retailer must therefore account for VAT on the supply to the manufacturer and the manufacturer can deduct input tax on the supply, subject to the normal deductibility criteria. The consumer, if VAT registered, has no VAT adjustment to make.

Multi-purpose Voucher

In most cases the voucher is likely to be treated as a Credit Voucher under VATA94, Schedule 10A but the exact characterisation will depend on the facts of the case. When the voucher is redeemed by the consumer with the retailer there is a supply by the retailer to the consumer of the goods, the consideration for which is the reimbursement by the manufacturer to the retailer of the voucher. The manufacturer should then reduce their output tax as a reduction in consideration and the retailer should increase their output tax to reflect the supply of the goods to the consumer.

Apportionment

In some cases a payment may cover a number of different things as listed in VATSC06660.

Change in VAT rates

The purpose of the legislation is to ensure that the correct amount of VAT is accounted for on the total amount paid for the goods in question by the final consumer. Therefore, the adjustment must be at the VAT rate that applied at the time of the final supply to the consumer and not the VAT rate (if different) that applied at earlier stages in the supply chain.

For example:

  • A manufacturer supplied goods at a VAT rate of 17.5% to a retailer. The VAT rate changes to 20% before the retailer supplies the goods on to the final consumer. The manufacturer must adjust their VAT Output tax at the 20% VAT rate applying to the final supply.
  • An importer supplied goods to a charity at the 20% VAT rate. The VAT rate applicable to the supply by the charity to the consumer of those goods is zero-rate. There is no adjustment to be made by the manufacturer as there was no VAT on the final supply.