UK: Update HMRC treatment of Credit Notes for VAT\GST
Last year there were changes in relation to UK treatment of VAT\GST document rules. We are seeing these filter through to practice now and so would like to share them with you.
They concern Credit Notes, i.e. the commercial document issued by the supplier to the customer produced as evidence of a lower sales value, e.g. of a cancellation, discount, refund or other commercial reason.
The changes reflect greater emphasis by the tax authorities on the correct documentation to support VAT\GST claims. We anticipate suppliers who deal direct with the public facing particular problems with VAT\GST reclaims on their credit notes, as HMRC try to close the VAT\GST gap. If your business has any difficulty with obtaining the correct document, then WAY2VAT can assist.
What has changed?
HMRC introduced new VAT\GST rules for credit notes on 1st September 2019. Suppliers and their business customers will need to comply when there is a change in the price (up or down) of an invoice. The rules are contained in VAT\GST General Regulations 1995 (as amended).
This article only looks at the position when there is a price decrease, although price increases have similarly been impacted by the law change. Failure to abide by the new rules will leave suppliers at risk of having to pay 20% VAT\GST back to HMRC, plus interest and, potentially, penalties.
Why has it changed?
Whilst the VAT\GST rules for invoicing have been well established, rules for credit notes were less formal. This allowed businesses to account for credit notes when entered in the accounting books, rather than when discounts were paid back to the customers. It even allowed suppliers to create “dummy” internal credit notes to support VAT\GST adjustments. Some taxpayers took advantage of these rules, plus given that there was no time limit for issuing credit notes, businesses were able to use the rules to circumvent the normal 4-year limitation period for errors. The changes in the rules however go beyond addressing the mischief of a few taxpayers. The rules will impact all B2B businesses in the UK.
What difference does it make to me?
The law now details the contents required in a credit note as follows:
- The identifying number of the document,
- The date of issue of the document,
- The name, address and registration number of the supplier,
- The name and address of the recipient of the supply,
- The identifying number and date of issue of the VAT\GST invoice or invoices relating to the supply for which there is a decrease in consideration,
- A description sufficient to identify the goods or services supplied,
- The amount of the decrease in consideration excluding VAT\GST,
- The rate and the amount (expressed in sterling) of the VAT\GST credited in respect of the decrease in consideration.
Businesses may find that the credit notes they have been issuing and accounting for before Sept 2019 will suffice today. However, where businesses issue a large number of invoices and credit many of them in one credit note, condition (v) above may be onerous.
In addition to the law stating what should be included in a credit note, it also states that the credit note must be issued within 14 days of the refund being given to a customer (a refund can be made by setting off the amount in customer ledger). Businesses that cannot meet this deadline are required to ask permission of HMRC for an extension.
Volume rebates, a warning.
Many distributors of goods allow their customers rebates based on volumes. A common practice is for the supplier to invoice the goods, and the customer to send debit notes to the supplier in arrears when rebate conditions have been met. This is no longer allowed.
The new rules clearly state that the supplier must issue the note evidencing the refund, not the customer. HMRC do not appear deliberately to have outlawed this practice, instead it seems it was not raised as an issue in public consultation. But it is an issue and businesses that rely on customers making rebate claims by debit note will need to approach HMRC for permission to carry on the practice.
What has not changed?
Businesses that make zero rated or exempt supplies are not impacted by the rules.
B2C Businesses, retailers etc, who do not issue full VAT\GST Invoices do not need to issue full credit notes, although they will be expected to demonstrate that customers have been refunded.
Arguably the rules might only apply where the supplier’s invoice and subsequent refund span one of its VAT\GST periods. For example, if a business has a VAT\GST period January to March, and issues an invoice on 1st February which it credits on 28th February, then the new credit note rule may not apply. However, HMRC would most likely still expect compliance, and best practice would be to adhere to the new rules in any event.
Lastly, the new rule does not appear to apply to cancellations of supplies. For example, if a supplier invoices for a delivery of goods which are subsequently returned in full by the customer, the new credit note rules may not be enforced. This because in these circumstances there has not been a “change in consideration for a supply”; rather, there has been a cancellation of a supply in entirety. Again, HMRC would most likely expect compliance with the new rules regardless, and best practice would be for businesses to adhere.
Can I have my cake…and eat it?
Suppliers who do not issue valid credit notes are not allowed to reduce their output tax on the value of any refund given to customers. The corollary must therefore apply…customers who receive a refund including VAT\GST, but who are not sent a credit note fulfilling all the conditions are not required to reduce their input tax. Taking such an approach is not recommended, but this position is one that HMRC have drafted themselves into.
What should I do?
If your business practice is for customers to send you debit notes for volume rebate claims, there could be some serious risks associated with these practices. You may be able to ask for a dispensation.
If your business commonly issues a credit note to adjust prices for multiple invoices, and you struggle to comply with condition e) in the Regulation (the condition that states the credit note should cross reference all invoice it adjusts), contact HMRC immediately.
If your business does not issue credit notes within 14 days of customers being granted discounts, because for example you run invoices once a month, contact HMRC and ask for an extension.
This will particularly effect any company with large volumes of purchase and sales transactions (particularly of goods), including manufacturing and retailing.
Practical application for reclaims
We at Way 2 VAT\GST notice credit notes on many transactions, and in particular there are issues here for event organisers to consider as hotels can have staged payments for large events. With pro-formas being issued in the run up to the event, then the final invoice being the right one for VAT\GST. However, if there a no-shows or other elements cancelled the credit note need to be recieved with full details.
If this is of interest or you have any questions on this please feel free to contact us.