Following a consultation HMRC have published ‘Revenue and Customs Brief 6: Changes in accounting for VAT after prices are altered’ to explain new rules for adjustments to VAT after changes in the price of goods or services.

The prices businesses charge for goods and services can be changed and this may be occur long after VAT has been accounted for on the supply.

  • Regulation 38 of the VAT Regulations applies where the price change occurs after the supplier has already accounted for the output tax on the original supply in a VAT Return.
  • Current rules do not impose a time limit for making VAT adjustments when price adjustments are made, but it is a requirement that the VAT must be adjusted. Failure to do so is an error which must be corrected within time limits set out in the Regulations and the VAT Act 1994.
    • Where a change in price takes place within the same VAT accounting period as the original transaction, no adjustment under Regulation 38 is required.

HMRC say some businesses are trying to use the current rules to gain a tax advantage by making VAT adjustments for reductions in price without actually refunding customers and by attempting to treat errors as price adjustments so that they may avoid the relevant time limits.

Under the new rules, from 1 September 2019:

  • an increase in price occurs when the change is agreed by both the supplier and the customer.
    • a debit note must be issued no later than 14 days after the price increase and
    • the supplier must account for the increase in VAT in the VAT period in which the change occurs
  • a decrease in price occurs when a supplier issues a refund to a customer.
    • the supplier has 14 days to issue a credit note from the time the decrease occurs.
    • the supplier must account for the decrease in the VAT period in which it takes place
    • a VAT-registered customer must reduce the amount of VAT it has claimed by the same amount.
    • credit notes can be issued before refunds being made, but must be issued no later than 14 days after the payment.

There are also new debit and credit note requirements and provisions to avoid double accounting where a debit/credit note equivalent document has been provided by the supplier to the customer before 1 September 2019.

HMRC updated their guidance for the change in September 2019 saying "HMRC recognises that changes to systems may take time" but without stating whether they would be applying a light touch to enforcing the new rules. 

Links to our guides:

Errors: VAT how to correct

What constitutes a valid VAT invoice?

External link:

‘Revenue and Customs Brief 6: Changes in accounting for VAT after prices are altered’

HMRC guidance: VAT manual VATSC06635