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UK Amends Rules On Manufacturers' Refunds

20 December 2013

The UK tax authority, HM Revenue and Customs (HMRC), has released secondary legislation to allow suppliers to adjust their VAT to take account of refunds they make to final consumers, including those made as part of a business promotion scheme.

The legislation has been released following a consultation exercise launched on May 31, 2013. Details of the responses received during this consultation were released alongside the legislation by HMRC on December 18, 2013.

UK law currently expressly allows a business in a direct relationship with a customer to adjust the VAT originally accounted for in the case of a post-supply adjustment. However, it is silent on the position where a manufacturer, which has no direct relationship with the final consumer of its products, makes a post-supply payment.

In the 2013 Budget, the Government announced its intention to legislate to allow manufacturers to adjust their VAT to take account of refunds they make to final consumers. In this context the term "refund" refers to a payment made by a manufacturer directly (or via a third party) to the customer of a retailer. These payments may be made for a number of reasons, for example: faulty products; damaged products; or customer dissatisfaction.

Normally when a retailer sells goods to a customer, it is the retailer that refunds money to the customer if those goods are returned, or a retrospective reduction in price is agreed. Where the goods are subject to VAT, the retailer is entitled to make an adjustment under regulation 38 of the VAT Regulations 1995 and reclaim the VAT declared to HMRC on the original transaction. A VAT registered purchaser must make a similar adjustment to any VAT reclaimed on the goods.

However, sometimes the purchaser seeks a refund of some, or all, of the price paid for the goods from the manufacturer and not from the retailer. This might happen, for example, when there is a major fault in the goods. However, regulation 38 does not explicitly address this situation.

Amendments are to be introduced as a result of a change in HMRC's interpretation of the precedent set by the ruling of the European Court of Justice in the case of Elida Gibbs (C-317/94). In the case, the Court held that the manufacturer was entitled to adjust its VAT to take account of refunds paid directly to final consumers under a promotion scheme. In that case a consumer could send a coupon to the manufacturer and claim a cash refund of part of the price paid to the retailer.

HMRC had not interpreted the judgment as applying where the manufacturer made a refund in cases of, for example, faulty or damaged goods. In such cases the refund by the manufacturer was viewed as compensation or an ex gratia goodwill payment and thus outside the scope of VAT. Following representations, HMRC has agreed to review its interpretation of the law and, with the publication of the secondary legislation, now intends to accept that in certain situations the manufacturer is entitled to adjust the VAT it has accounted for when it makes a refund direct to the retailer's customer.

The secondary legislation is to amend regulation 38 of the VAT Regulations 1995 with effect from April 1, 2014.

TAGS: court | VAT tax authority guidance | tax | business | value added tax (VAT) | law | tax authority | legislation | HM Revenue and Customs (HMRC) | regulation | retail | HM Revenue and Customs (HMRC) | VAT case law | VAT refunds | Europe | Regulations

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