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New rules from HMRC will affect how VAT returns are adjusted.

Draft regulations from HMRC will change Regulation 38. The changes are designed to ensure that businesses can only adjust their output tax where there has been a genuine price reduction and they have refunded money to customers.

What are the new regulations about?

This involves potential changes to VAT Regulation 38 which affects businesses making adjustments to their VAT liabilities after a sale has taken place, for instance when a new price was negotiated. HMRC is seeking to tighten the use of the regulation, in particular requiring businesses to issue a credit note and give a refund to customers when a price reduction occurs before a VAT adjustment can be made.

At the moment Regulation 38 requires that an adjustment shall be made to the VAT return covering the period in which the change takes place. This changes the output tax the supplier is liable to pay to HMRC.

HMRC states that it has evidence that some businesses are attempting to abuse Regulation 38 by applying it to situations which should properly be dealt with under error correction provisions. It claims this enables it to make adjustments to its output tax even when no refund is given to the customer, and to circumvent the four year time limit.

Clearly where a business simply alters the VAT return rather than using the error correction method, there may be a financial advantage.

What are the proposed new regulations?

  • Regulations 15, 24 and 38 of the VAT Regulations 1995 will be amended by Statutory Instrument. The changes will ensure that adjustments can only be made under Regulation 38 when the supplier has issued a credit note to the customer, and has given them a refund
  • it will also ensure that errors resulting from a failure to make adjustments must be corrected in accordance with the existing error correction provisions under section 80 VATA.

Further information

The draft statutory instrument is available here.

The consultation on the proposed changes closed on 15 April 2019, with the measure expected to be introduced by September 2019.

Article from ACCA In Practice