Credits and debits

Produced by Tolley

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...

IP COMPLETION DAY: 11pm (GMT) on 31 December 2020 marked the end of the Brexit transition / implementation period entered into following the UK’s withdrawal from the EU. At this point in time, key transitional arrangements came to an end and significant changes began to take effect across the UK’s VAT and customs regime. This document contains guidance on subjects potentially impacted by these changes. Before continuing your research, see the Brexit — overview guidance note.

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

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