VATREC13090 - Credit and Debit notes: Do the four-year capping provisions apply to Regulation 38 adjustments?
Adjustments properly made under Regulation 38 may relate to tax periods older than four years. This is because Regulation 38(1A) was removed on 1 April 2009 following the General Motors Acceptance Corporation UK Ltd (GMAC) tribunal decision (LON/01/242). This decision found that where a change in consideration takes place more than three years after the original supply, a business has a directly effective Community right under Article 11(C)(1) of the Sixth VAT Directive to adjust their VAT account. HMRC accepted therefore that regulation 38(1A) cannot be used to bar genuine adjustments arising from changes in consideration and did not appeal this finding to the High Court. Other aspects of the GMAC decision are in VATREC13120.
However, failure to make genuine Regulation 38 adjustments in accordance with Regulation 38(5) i.e. in the accounting period in which the increase in consideration or decrease in consideration occurs, is an error and must be corrected within four years of that tax period.
VAT Refunds Manual contains detailed guidance on how to apply the 4-year capping rules where the person has failed to make the regulated adjustment in the course of business.