Where a supply is reduced in value, the supplier can claim from HMRC the VAT on the overcharged element. However, if a VAT registered customer does not receive a credit note to set against the original invoice, the customer will not repay to HMRC the over claimed VAT.
Stricter rules will be introduced as to how and when adjustments to VAT should be made following a reduction in price. Legislation will tighten definitions for Regulation 38, Value Added Tax Regulations 1995 to ensure a credit note is issued to customers.
Customers will then have no excuse for failing to repay to HMRC the VAT which was previously claimed on an overstated invoice.
The changes will come into force from September 2019.
This will affect both the supplier and the customer to transactions whose values are overstated in the VAT invoices. In particular, the supplier will have to review the timing of any adjustments and ensure a credit note is issued to the customer.