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Credit (Note) where credit's due

By Vaughn Chown

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How should a price reduction be treated for VAT purposes after the initial invoice has been issued?  The question is an important one because VAT claims are available for the supplier, provided they are made correctly.  The issue will arise whenever there are fee negotiations or price disputes, as well as where typing errors are corrected.

Consider an example.  A VAT invoice (e.g. £1,200) is issued but not paid, and discussions follow.  The supplier and customer eventually agree a reduced price (e.g. £600), which is paid.

After protracted negotiations, the supplier might be relieved to receive £600, though still aggrieved not to have received the full £1,200.  While all this is going on, it can escape the supplier’s attention that £200 of VAT was charged in the sales invoice.  Although this £200 has not been collected from the customer in full, if the supplier is not using the cash accounting scheme all the VAT will have been declared in the supplier’s VAT return as a liability and paid to HMRC.  Can the supplier recover the unpaid part of this VAT (£100)?

This issue was addressed in the recent case of Barlin Associates Ltd v Revenue and Customs Commissioners ([2014] UFTT 957, released 15 October 2014).

HMRC said the supplier should claim bad debt relief.

The Tribunal noted that, although the debt was old, payment from the customer was still expected by the supplier and the debt had not been written off in the supplier’s accounts.  This was not a bad debt but an agreed price reduction.  A credit note should be issued to correct the reduction.

“The effect is that Barlin [the supplier] was entitled to issue a credit note for the balance of the invoices issued years earlier which it had agreed with Autonomy [the customer] were an overcharge because there was a reduction in the price of the supply after the supply took place.” (paragraph 32)

It is the VAT in the credit note that forms the basis of a claim from HMRC under Regulation 38, VAT Regulations 1995.

“In our judgment, reg 38 is the means whereby any claim settled similarly to that of CCC is to be adjusted as a reduction in consideration.” (paragraph 29, quoting a preceding case)

Another point highlighted in this case is that there is no time limit in Regulation 38.  HMRC had argued that claims under that regulation were subject to a time limit of four years in Section 80, VAT Act 1994.  The Tribunal disagreed and allowed the supplier’s claim against invoices initially issued many years previously.

“If the credit note is issued more than 4 years after the original invoice, on HMRC’s view a taxpayer which is insolvent or unregistered as at the date the credit note is issued is unable to claim the refund.  Yet under Art 90 PVD [the Principal VAT Directive] it has a directly effective right to do so.” (paragraph 40)

Suppliers could be in line to make significant VAT claims in respect of any price reductions agreed after the invoice has been issued.  The Barlin case has shown that, although the price reduction might have been agreed some time ago, perhaps even before deregistration, this is not a barrier to making a successful claim.

Published November 2014