VATREC13080 - Credit and Debit notes: When do Regulation 38 adjustments need to be made to the VAT account?

Regulation 38(5) says:

“Every entry required by this regulation must be made in that part of the VAT account which relates to the prescribed accounting period in which the increase in consideration or decrease in consideration occurs.” The situation in respect of adjustments to the value of supplies of goods of a kind used in missing trader intra-community fraud, which are subject to the reverse charge, is covered by regulation 38A, inserted by SI 2007/1418, regulation 4(c), operative from 1 June 2007.

38A(1) Where regulation 38 applies and -

(a) as a result of an increase in consideration for a supply it becomes one to which section 55A(6) of the Act applies; or

(b) as a result of a decrease in consideration for a supply it ceases to be one to which that section applies,

both the maker, and the recipient, of the supply shall make such entries in the VAT payable portion of their VAT accounts as are necessary to account for that fact

38A(2) Paragraph (5) of regulation 38 applies to any entry required by this regulation as it applies to any entry required by that regulation.

38A(3) None of the circumstances to which this regulation applies is regarded as giving rise to any application of regulations 34 and 35 except insofar as there is an error arising from a failure to make any entry required by this regulation.

To support the correct treatment of such reverse charge adjustments, regulation 38(1C) was inserted by SI 2007/1418, operative from 1 June 2007.

38(1C) Where an increase or decrease in consideration relates to a supply in respect of which it is for the recipient, on the supplier’s behalf, to account for and pay the tax, the prescribed accounting period referred to in paragraph (1) is that of the recipient, and not the maker, of the supply.

In practical terms this means that, if:

  • a supply is one to which the reverse charge procedure applies;
  • its value changes but, at its revised value, it remains within the reverse charge procedure; and

the change takes place after the end of the prescribed period of the customer in which the increase in consideration or decrease in consideration occurs then the customer adjusts both his output tax and input tax accounts to reflect the revised value.

Alternatively, if:

  • a supply is one to which the reverse charge procedure applies;
  • its value changes and, at its revised value, it is outside the reverse charge procedure; and
  • this change takes place after the prescribed accounting period of the supplier in which the increase in consideration or decrease in consideration occurs

then the supplier adjusts his output tax and the customer adjusts both his output tax and input tax accounts to reflect the revised value.

A new section 26AB to the VAT Act 1994 and new VAT regulations 172K - M cover adjustments to be made by recipients of supplies of goods of a kind used in missing trader intra-community VAT fraud, when they have not paid for the goods within six months of receiving the supply of goods. In such a situation the customer adjusts both his input tax and output tax accounts.

As the supplier and customer may be on different staggers, this means that input tax can be adjusted in a tax period later than that in which output tax is adjusted.

Regulation 38(5) indicates that an adjustment to the VAT account must be made in the accounting period in which the decrease in consideration occurs. This will be when the supplier pays the amount of the decrease to the recipient of the supply or to any other person entitled to receive the payment. This includes where an amount is set off against an existing liability.

Where there is a genuine increase or decrease in the consideration for a supply then that increase or decrease should be given effect in the business accounts as and when the change is agreed by both parties in the case of an increase in price, or when the supplier makes a refund to the customer (or other entitled person) for a decrease in price.