Credits and debits

Produced by Tolley
Credits and debits

The following Value Added Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Credits and debits
  • Crediting a customer
  • Regulations for VAT adjustments in the course of business (reg 38)
  • Valid credit / debit notes
  • Accounting for VAT shown on a credit note
  • Anti-avoidance domestic reverse charge supplies
  • Bad debts
  • Returned goods
  • Goods sold to satisfy a debt
  • Insolvent businesses
  • More...

This guidance note provides an overview of how debits and credits should be dealt with from a VAT perspective.

Crediting a customer

If a supplier has agreed to issue a credit note to a customer or offers a contingent discount and the customer is able to recover all of the VAT incurred, the supplier and customer can agree to issue a credit note without VAT. If the parties do not agree that the credit note may be issued without VAT, the supplier should issue the credit note including VAT and the VAT amount should be recovered from HMRC via the suppliers' VAT return.

If preferable the customer can issue the supplier with a debit note. This option is commonly used if the customer has been issuing self-billed invoices (see the Self-billing guidance note for more information).

Regulations for VAT adjustments in the course of business (reg 38)

The Government has introduced legislation that amends the rules on output tax adjustments for retrospective price reductions with effect from 1 September 2019. From this date, businesses can only make adjustments where they have actually given customers a refund. The regulations have been mended to reflect the following changes:

  1. an increase in price occurs is when both the supplier and the customer agree to the change. A debit note must be issued no later than 14 days after the price increase. The supplier must account for the increase in VAT in the VAT return period covering the date the change occurs.

  2. a decrease in price occurs when a supplier makes a refund to either the customer or other person entitled to receive the payment. A credit note must be issued within 14 days from the time the decrease occurs. The supplier must account for the decrease in the VAT return period in which it takes place. A VAT-registered customer must reduce the amount of VAT it has claimed by the same amount. It is important to note that the supplier

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