New rules that make changes to the issuing of credit notes under certain circumstances, will come into effect from 1 September 2019. The changes have been put in place to target certain businesses who seek to create a tax advantage, by making VAT adjustments for reductions in price without refunding their customers. The change will ensure that customers benefit from reductions in the price paid and the new rules will also affect businesses that issue credit notes as a matter of course.

The rules will also target businesses that incorrectly attempt to treat errors as price adjustments for the purpose of avoiding the relevant time limits. Whilst HMRC is clear that Regulation 38 cannot be used in these circumstances, the new legislation will put this beyond doubt. Regulation 38 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. Under the new rules, Regulation 38 may only be used to reduce the amount of VAT paid to HMRC when a refund is actually made.

The new rules will ensure that:

• the time an increase in price occurs is when the change is agreed by both the supplier and the customer – a debit note must be issued no later than 14 days after the price increase – the supplier must account for the increase in VAT during the VAT period, in which the change occurs.
• a decrease in price occurs when a supplier makes a refund to a customer, or other person entitled to receive the payment – a supplier has 14 days to issue a credit note from the time the decrease occurs – a supplier must account for the decrease in the VAT period in which it takes place – a VAT-registered customer must reduce the amount of VAT it has claimed by the same amount. This does not prevent a supplier issuing credit notes in advance of refunds being made, but ensures that it is issued no later than 14 days after the payment.