Tribunal case re VAT credit note procedures

This tribunal case is further evidence of the need to follow the right procedures to secure the desired outcome.

The taxpayer manufactured UPVC windows and doors which it supplied to retailers and wholesalers. In addition, at its own cost, the appellant installed sample windows and doors into the showrooms of its customers. As part of the agreement, the taxpayer had sent such customers invoices for the promotional items. However customers were never, in practice, required to pay these invoices. Initially the taxpayer accounted for VAT on the invoices and was therefore significantly out of pocket.

In 2003 the in-house accountant became aware of the procedure, which included the use of individual promotional accounts showing the debtors that were not being pursued. He concluded that the accounting treatment was incorrect. The customer did not owe the amount, and as ownership of the goods remained with the taxpayer, thus there had been no supply and no VAT was due to HMRC.

The taxpayer tried to correct the VAT position by making internal adjustments crediting each individual promotional account with an amount equal to the amount owed. The resulting adjustment and recovery of the overpaid output VAT was included in the taxpayer’s VAT return for the period to December 2003.

At a subsequent routine VAT inspection, HMRC disagreed with the steps taken by the taxpayer. HMRC accepted that no supply had taken place, but felt that credit notes should be issued and a voluntary disclosure made. The taxpayer appealed arguing that there had been a decrease in the consideration for a supply within the relevant VAT regulations. The company were reluctant to issue credit notes because that would have released the customers from the obligation to only display the company’s products in their showrooms.
The tribunal agreed that because there had been no supply, VAT was not payable and, provided the correct procedures were followed, the VAT should be repaid to the taxpayer. However the taxpayer’s appeal was dismissed as the taxpayer had not followed the correct procedures. In particular the taxpayer had not communicated its actions to its customers at all and its schedule showing the changes was ‘nothing more than an internal accounting document’. It did not have the same effect as a credit note.


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At the start of the process they were still heavily immersed in their day to day operations so we can get a full flavour for their ambitions, aspirations and growth plans. We quickly recognised there were sufficient tax savings which can be achieved by changing the structure from a partnership to a corporate entity. We carried out a business valuation and disposed of the goodwill from the old to the new business. Unfortunately, as often is the case with efficient tax planning, HMRC got involved and disputed our valuation.

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