The prices businesses charge for goods and services can be reduced after VAT has been accounted for on a supply. An 
example is when a business delivers goods, some of which are faulty, and it agrees with its customer that the price should be reduced.
When this occurs a business normally sends its customer a credit note and gives a refund. Under the VAT Regulations 1995 (‘the Regulations’), the suppliers must reduce their output tax, and their VAT-registered customers must adjust their input tax.
Businesses may also increase the price of a supply, for example, when more work is required to complete a task than was originally anticipated. In these cases, businesses normally issue debit notes for the increased amount and account for the additional VAT. Their VAT-registered customers may then recover the additional input tax, subject to the normal rules.
Price adjustments may occur long after goods or services have been supplied. Regulation 38 of the Regulations applies to cases where the price change occurs after the supplier has already accounted for the output tax on the original supply in a VAT Return.
The 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 in accordance with requirements, and within time limits set out in the Regulations and the VAT Act 1994.
In cases where an increase or decrease in price takes place within the same VAT accounting period as the original transaction, no adjustment under Regulation 38 is required, as the price change is accounted for in that same VAT period.
HMRC is making changes as there is evidence that some businesses are trying to use the current Regulations to gain a tax advantage by making VAT adjustments for reductions in price without refunding their customers.
More information about the changes can be found at .Gov, alternatively why not give us a call as VAT is complicated and our team of experts can help you stay on the right side of the regulations.
