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C9: VAT changes in consideration

Adjustment of VAT accounts

Adjustment of VAT accounts

 

"(1)     This regulation applies where—

(a)     there is an increase in consideration for a supply, or

(b)     there is a decrease in consideration for a supply,

which includes an amount of VAT and the increase or decrease occurs after the end of the prescribed accounting period in which the original supply took place.

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(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.

But this paragraph does not apply to the circumstances referred to in regulation 38A.

 

(2) Where this regulation applies, both the taxable person who makes the supply and a taxable person who receives the supply shall adjust their respective VAT accounts in accordance with the provisions of this regulation." (SI 1995/2518, r.38(1) - (2))

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Change of method for calculating tax liability does not involve a decrease or increase in consideration after the account period

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[54] Until it was revoked in 2009, regulation 38 used to contain a provision which said that it did not apply to “any increase or decrease in consideration which occurs more than three years after the end of the prescribed accounting period in which the original supply took place”. In General Motors Acceptance Corpn (UK) plc v Revenue and Customs Comrs (2003) VAT decision 17990 a tribunal held that this provision was ineffective because it was incompatible with the predecessor to article 90 of the Principal VAT Directive - the reason being that imposing a limitation period “has the effect of ousting the taxable person’s basic right to be taxed on the consideration received by him and no more” (see para 65). This is clearly right. It is right because no adjustment can be made under regulation 38 unless and until an event occurs, however long after the original supply was made, which reduces the consideration actually received by the taxable person. It would be contrary to principle if the taxable person was barred from making the necessary adjustment to its tax liability to take account of such an event by a time limit which had expired
before the event occurred and the adjustment was capable of being made.
[55] That rationale, however, has no application in a case of the present kind where what is said to constitute a “decrease in consideration” does not depend on any event which has occurred since the supply of services was made. All that has happened is that the taxpayer has subsequently altered the way in which it has calculated its VAT liability. All the matters, however, on which the calculation of its liability is based (the amount of fees received from customers and the amount of the prize money paid out) were established when the original supply was made - indeed even before each bingo session began. Nothing has happened since then which needs to be brought into account and which the taxpayer might have been
prevented from bringing into account if there were a time limit. This is consistent with the fact that regulation 38 and article 90 are concerned with actual payments or changes in the liability to make payments which occur after a supply of goods or services has taken place and not with a mere subsequent change of accounting method." (AG v. KE Entertainments Ltd [2020] UKSC 28)

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Method of adjustment

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"(3)     Subject to paragraph (3A) below, the maker of the supply shall—

(a)     in the case of an increase in consideration, make a positive entry; or

(b)     in the case of a decrease in consideration, make a negative entry,

for the relevant amount of VAT in the VAT payable portion of his VAT account.

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(4)     The recipient of the supply, if he is a taxable person, shall—

(a)     in the case of an increase in consideration, make a positive entry; or

(b)     in the case of a decrease in consideration, make a negative entry,

for the relevant amount of VAT in the VAT allowable portion of his VAT account." (SI 1995/2518, r.38(3) - (4))

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Reverse charge supplies

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"(3A)     Where an increase or decrease in consideration relates to a supply on which the VAT has been accounted for and paid by the recipient of the supply, any entry required to be made under paragraph (3) shall be made in the recipient's VAT account and not that of the supplier." (SI 1995/2518, r.38(3A))

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Change causing supply to become/cease to be reverse charge

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"(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.

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

(3)     None of the circumstances to which this regulation applies is to be 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." (SI 1995/2518, r.38A)

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For increase in consideration must hold a debit note

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"(4A)     In the case of an increase in consideration, no entry may be made under paragraph (4) unless the recipient of the supply holds the debit note which the supplier is required to provide under regulation 15C(2).

 

(8)     Paragraphs (4A) and (5) do not apply in cases where an adjustment in relation to an increase or decrease in consideration has been made in accordance with this regulation before 1st September 2019." (SI 1995/2518, r.38(4A), (8))

 

Entries in VAT account for period of increase/decrease

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"(5)     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.

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(8)     Paragraphs (4A) and (5) do not apply in cases where an adjustment in relation to an increase or decrease in consideration has been made in accordance with this regulation before 1st September 2019." (SI 1995/2518, r.38(5), (8))

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No application of error correction procedures

 

"(7)     None of the circumstances to which this regulation applies is to be 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." (SI 1995/2518, r.38(7))

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FTT does have jurisdiction over r.38 adjustments

 

"We consider that the FTT has jurisdiction under section 83(1)(b)  ATA to determine whether an adjustment may be made under  regulation 38 and, if so, what adjustment should be made. We agree with the comments of the VAT Tribunal in GMAC. If HMRC refuses to accept an adjustment under regulation 38 then it follows that there is a dispute about the value of the supply and that is directly related to the VAT chargeable on the supply. We do not consider that it can be right that, in such circumstances, the taxable person must make a separate claim under section 80 in order to pursue an appeal although such a claim could be made." (HMRC v. Iveco Limited [2016] UKUT 263 (TCC), §§21…22, Warren J and Judge Sinfield).
 

FTT does have jurisdiction over r.38 adjustments

No time limit but must appeal first refusal

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“However, it does not follow from this that, once BBL had made the adjustment, in the 12/11 VAT return, and HMRC had refused to make the repayment that BBL said arose as a consequence, Parliament intended BBL to be able to continue indefinitely to request HMRC to make the repayment and treat each successive affirmation of the original refusal as a new appealable decision.” (Buckingham Bingo Limited v. HMRC [2019] UKUT 140 (TCC), §41, Judge Jonathan Richards and Judge Andrew Scott).
 

No time limit but must appeal first refusal

Adjustment where first supplier refunds final consumer directly

 

Adjust only the first supplier and final consumer

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"(1)     Where—

(a)     there is a decrease in consideration for a supply of goods which includes an amount of VAT and the decrease occurs after the end of the prescribed accounting period in which the original supply took place,

(b)     the supply is the final supply in a chain of supplies made by taxable persons which relates to the same goods,

(c)     the decrease in consideration is as a result of a relevant payment (which may form part of a larger payment that includes an element of compensation) that reduces the taxable amount which serves as a basis for determination of the VAT payable by the first supplier, and

(d)     the amount of the relevant payment equates to the whole, or a proportion, of the price paid for the goods by the final consumer to the final supplier and does not exceed the amount so paid,

then, in regulation 38(2), the reference to “the taxable person who makes the supply” shall include a reference to the first supplier and the reference to “a taxable person who receives the supply” shall include a reference to a final consumer who is a taxable person." (SI 1995/2518, r.38ZA(1))

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Relevant payment

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"“relevant payment” means—

(a)     a cash refund made by the first supplier direct to the final consumer—

(i)     to reflect the reduced value (including a reduction to nil) of goods which are faulty, damaged or otherwise do not fully meet expectations of the final consumer,

(ii)     as a result of a product recall, or

(iii)     in accordance with the terms of a sales promotion scheme operated by the first supplier under the terms of which the final consumer is required to provide proof of purchase of specified goods to the first supplier; or

(b)     a reimbursement made by the first supplier direct to the final supplier—

(i)     which equates to the redemption value of a money-off coupon issued by the first supplier and used by the final consumer in part payment for goods purchased from the final supplier, or

(ii)     to redeem a money-off coupon issued by the first supplier in any of the circumstances specified in sub-paragraph (a)(i) or (ii) and used by the final consumer in full or part payment for goods purchased from the final supplier." (SI 1995/2518, r.38ZA(2))

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“cash refund” includes a payment made by cheque or equivalent but does not include the provision of a face-value voucher falling within Schedule 10A to the Act [or a voucher falling within Schedule 10B to the Act." (SI 1995/2518, r.38ZA(2))

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Final consumer

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“final consumer” means the recipient of the supply referred to in paragraph (1)(b);" (SI 1995/2518, r.38ZA(2))

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Final supplier

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“final supplier” means the person who makes the supply referred to in paragraph (1)(b);" (SI 1995/2518, r.38ZA(2))

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First supplier

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“first supplier” means the first person in the chain of supplies that ends with the final consumer;" (SI 1995/2518, r.38ZA(2))

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Different rates: use rate applied by final supplier

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"(3)     Where the rate of VAT applicable to the supply made by the first supplier differs from the rate of VAT applicable to the supply made by the final supplier, the adjustment made by the first supplier shall be at the rate of VAT applied by the final supplier." (SI 1995/2518, r.38ZA(3))

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Adjustment where first supplier refunds final consumer directly

Credit and debit notes on change in consideration

 

Credit notes in general, see E4: VAT invoices and credit notes

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"(1)     This regulation applies to increases and decreases in consideration as described in regulation 24A." (SI 1995/2518, r.15C(1))

 

"(a)     an increase or decrease in consideration occurs at the time specified in regulation 24B" (SI 1995/2518, r.15C(13)(a))

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Increase in consideration: debit note

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"(2)     Where there is an increase in consideration, the supplier must, no later than the end of the period of 14 days beginning with the day on which the increase occurs, provide to the recipient of the supply a debit note as specified in paragraph (3).

 

(3)     For the purposes of this regulation, a “debit note” is a document which includes the following particulars—

(a)     the identifying number of the document,

(b)     the date of issue of the document,

(c)     the name, address and registration number of the supplier,

(d)     the name and address of the recipient of the supply,

(e)     the identifying number and date of issue of the VAT invoice or invoices relating to the supply for which there is an increase in consideration,

(f)     a description sufficient to identify the goods or services supplied,

(g)     the amount of the increase in consideration excluding VAT,

(h)     the rate and the amount (expressed in sterling) of the VAT chargeable in respect of the increase in consideration.

 

(4)     The requirement in paragraph (2) to provide a debit note does not apply in cases where, in relation to the increase in consideration, a document having the same purpose as a debit note has been provided by the supplier to the recipient of the supply before 1st September 2019." (SI 1995/2518, r.15C(2) - (4))

 

Decrease in consideration: credit note

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"(5)     Where there is a decrease in consideration, the supplier must, no later than the end of the period of 14 days beginning with the day on which the decrease occurs, provide to the recipient of the supply a credit note as specified in paragraph (6).

 

(6)     For the purposes of this regulation, a “credit note” is a document which includes the following particulars—

(a)     the identifying number of the document,

(b)     the date of issue of the document,

(c)     the name, address and registration number of the supplier,

(d)     the name and address of the recipient of the supply,

(e)     the identifying number and date of issue of the VAT invoice or invoices relating to the supply for which there is a decrease in consideration,

(f)     a description sufficient to identify the goods or services supplied,

(g)     the amount of the decrease in consideration excluding VAT,

(h)     the rate and the amount (expressed in sterling) of the VAT credited in respect of the decrease in consideration.

 

(7)     The requirement in paragraph (5) to provide a credit note does not apply in cases where, in relation to the decrease in consideration, a document having the same purpose as a credit note has been provided by the supplier to the recipient of the supply before 1st September 2019." (SI 1995/2518, r.15C(5) - (7))

 

Exception if not required to provide invoice for original supply

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"(8)     In cases where a supplier was not required by these regulations to provide a VAT invoice in relation to the original supply, the requirement in paragraph (2) to provide a debit note and the requirement in paragraph (5) to provide a credit note do not apply unless the recipient of the supply is a taxable person and requests a debit note or a credit note (as the case may be) from the supplier.

(9)     Where a request described in paragraph (8) has been made—

(a)     the period specified in paragraph (2) or (5) (as the case may be) begins with the day on which the request is made; and

(b)     paragraph (3)(e) or (6)(e) (as the case may be) does not apply." (SI 1995/2518, r.15C(8) - (9))

 

Simplified invoice for original supply

 

"(10)     In relation to any increase or decrease in consideration for supplies to which regulation 16A applies, paragraph (3)(a), (d) and (e) or (6)(a), (d) and (e) (as the case may be) does not apply."  (SI 1995/2518, r.15C(10))

 

Adjustments by first supplier and final consumer only

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"(11)     Where there is a decrease in consideration to which regulation 38ZA applies—

(a)     paragraphs (5) to (10) do not apply; and

(b)     if the final consumer requests an accounting document in relation to the decrease in consideration, the first supplier must, no later than the end of the period of 14 days beginning with the day on which the request is made, provide to the final consumer a document which includes the following particulars—

(i)     the date of issue of the document,

(ii)     the name, address and registration number of the person issuing the document,

(iii)     a description sufficient to identify the goods supplied,

(iv)     the amount of the decrease in consideration excluding VAT,

(v)     the rate and the amount (expressed in sterling) of the VAT credited in respect of the decrease in consideration."  (SI 1995/2518, r.15C(11))

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Electronic document if final consumer agrees

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"(12)     Where the recipient of the supply or, in cases where it is applicable, the final consumer agrees, the documents described in paragraphs (3), (6) and (11)(b) may be provided in electronic format." 

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"(b)     “final consumer” and “first supplier” have the meanings given by regulation 38ZA(2)." (SI 1995/2518, r.15C(12), r.15C(13)(b))

 

Power to relax requirements

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"(14)     The Commissioners may, in such cases as they think fit, dispense with or relax the requirements in this regulation in such manner as they think fit." (SI 1995/2518, r.15C(14))

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Credit and debit notes on change in consideration

Must use s.80 if tax was wrongly paid

 

"[24]...Hence it is not in dispute that, if the taxpayer’s claim for repayment of VAT accounted for between 1996 and 2004 falls within section 80, the claim is time-barred. The taxpayer is therefore in the position of having to show, in order to succeed, that the output tax for which it accounted to HMRC on a game by game basis in those years was indeed due to HMRC. That is because if the amount which the taxpayer is claiming “was not VAT due to [HMRC]”, then pursuant to section 80(4) and (7), HMRC is not liable to credit or repay that amount." (AG v. KE Entertainments Ltd [2020] UKSC 28)

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Generally only one correct way to calculate tax

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"[31] Counsel for the taxpayer was concerned to emphasise that deciding how to apportion a unitary price charged by a supplier into two elements for the purpose of calculating VAT can involve an exercise of evaluative judgment, as to which differences of view can exist within a spectrum of what is reasonable. This is undoubtedly true. But it does not follow that there must be more than one method of apportionment which the supplier may lawfully use. Although that is a possible conclusion for a court or tribunal to reach, in most cases where such a question is raised the court or tribunal can be expected to exercise its own judgment as to which method should be used. There is good reason for this. In matters of taxation consistency of approach is of critical importance. If the same exercise of apportionment may lawfully be carried out in more than one way, the result is likely to be that different taxpayers whose situations are identical will lawfully pay different amounts of tax. That offends the principle of equal treatment. It is also capable of distorting competition between businesses." (AG v. KE Entertainments Ltd [2020] UKSC 28)

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Must use s.80 if tax was wrongly paid

Failure to apply r.38 gives rise to s.80(1B) claim in respect of period in which r.38 should have been applied

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“If T fails to implement Regulation 38, that is not an end of T’s claim to credit or repayment of £200. The result of failing to implement regulation 38 is that, in the case where the amount otherwise due exceeds £200, T has paid too much VAT in the prescribed period just mentioned. It is accepted by both HMRC and Iveco that section 80 is applicable. In other words, the reduction in VAT which T could have achieved by using regulation 38 remains VAT which was not due to HMRC so that T can make a claim under section 80 to recover it. We consider that that is a correct and purposive approach to the legislation…In our judgment, a claim under the current version of section 80, following the failure by a taxpayer to utilise regulation 38, would fall within section 80(1B) and not section 80(1). In the example we have given, T should have included a negative entry in the relevant account. Not having done so, too much VAT has been paid; but this was not because an incorrect amount of output tax had been included in the accounts, but because a negative entry had not been made to the VAT payable portion of the account.” (HMRC v. Iveco Limited [2016] UKUT 263 (TCC), §§21…22, Warren J and Judge Sinfield).

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But only to the extent that there was output tax to absorb the negative entry

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“If the amount of VAT for which T accounts to HMRC is less than £200, say £50, T will have paid £150 by way of VAT, which ought, in principle, to be repaid. It is not, however, entirely apparent to us how section 80 provides T with an immediate claim for the difference, £150, between the £50 paid and the £200 which ought in principle to be repaid. Although T paid the whole of the £200 when the original supply was made, when he did so it was VAT due for the relevant accounting period. T will not have paid that £150 in the later accounting period when regulation 38 should have been implemented so that section 80(1B) would not appear to apply. It is not clear that recourse could be had to section 80(1) (or the old section 24 Finance Act 1989 while that was in force) whether in that later accounting period or any subsequent accounting period. One solution is that T could carry forward the £150 to the next accounting period and reduce his VAT payable in relation to that period. This would not, however, provide a repayment trader with a solution. If there is no remedy for T in such a situation, he may still be able to assert directly effective rights through the mechanism of section 80 but that would depend on establishing that regulation 38 did not provide a fully effective vindication of his article 11C(1) rights. We do not need to resolve this particular difficulty for the purposes of the present appeal.” (HMRC v. Iveco Limited [2016] UKUT 263 (TCC), §23, Warren J and Judge Sinfield).
 

Failure to apply r.38 gives rise to s.80(1B) claim in respect of period in which r.38 should have been applied
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