Credit notes - legal requirement?

[neilsolaris]

Hi,

We just received a refund from a supplier, because of their dodgy service. We are VAT registered, and paid VAT originally, and also got the VAT refunded.

Am I right in saying that the supplier must provide a credit note, showing the VAT refunded? I don't think they'll send one unless I ask for it. But I just wanted to check if such a document was essential or not.

Many thanks for your help.

 

[neilsolaris]

I just read that refunds for poor workmanship (in this case providing a poor service) is actually classed as compensation, and is outside the scope of VAT. Is that correct?

I read that in this situation, what the company should have done, was to provide us with a credit note for the net amount we paid, and then they could reclaim a 1/6 of that amount as input tax.

I've already requested a credit note, so I'll see what comes back. But am I right in saying that I shouldn't record any VAT in connection with this refund? If that's the case, we're 20% up on the deal! It's not a huge amount though.

Thanks for any clarification.

 

[Gyumri]

A credit note should be issued to cancel the invoice you would have received and paid and against which you've been refunded.

If you've got the full refund but you've already reclaimed the input vat then you can adjust your next vat return accordingly as I am sure your supplier will do with theirs so that HMRC is not losing anything.

If you cannot obtain a credit note then mark the invoice anyway as cancelled.

 

[neilsolaris]

Many thanks Gyumri. I've already reclaimed the input VAT.

I'm using Quickbooks. Do you know what the process is for cancelling an invoice? I didn't know that was possible.

 

[The Byre]

As of 01.09.2019, the rules changed - credit notes now have to be every bit as detailed as invoices.

The law now details the contents required in a credit note as follows:

1. The identifying number of the document,
2. The date of issue of the document,
3. The name, address and registration number of the supplier,
4. The name and address of the recipient of the supply,
5. The identifying number and date of issue of the VAT invoice or invoices relating to the supply for which there is a decrease in consideration,
6. A description sufficient to identify the goods or services supplied,
7. The amount of the decrease in consideration excluding VAT,
8. The rate and the amount (expressed in sterling) of the VAT credited in respect of the decrease in consideration.

Here is the bedtime reading involved - https://www.legislation.gov.uk/uksi/2019/1048/made

 

[lesvatadvice]

A credit note documents a reduction in consideration, in this case, for poor quality work. As above, this is now a legal requirement. But if the supplier fails to provide one, then do your own adjustment, including VAT, I suggest.

 

[The Byre]

Until that change in the law, credit notes were pretty informally issued. This allowed businesses to account for credit notes when entered in the accounting books, rather than when discounts were paid back to the customers. It even allowed suppliers to create their own bogus internal credit notes to support VAT adjustments (aka mistakes!)

Some businesses took advantage of these rules and there was no time limit for issuing credit notes, so businesses were able to use the rules to circumvent the normal 4-year limitation period for errors. The 2019 change has now put a stop to all those games.

EDIT - Under the new rules, changes must be made as listed above no later than 14 days after the change has occurred and creating your own internal note is no longer allowed. Suppliers and their business customers will have to comply when there is a change in the price (up or down) of an invoice.

 

[neilsolaris]

Many thanks for everyone's advice.

I'll try to have a read through that later Byre! I guess I can leave the contents of the credit note to the supplier, if they ever provide one.

And if they don't, I'll do as your suggesting Les, and record the refund as a mirror image of what we paid originally (i.e. keep the net amount, VAT etc the same as before). That's actually how I've accounted for it so far.

 

[neilsolaris]

So, just as I was typing before, they emailed me the credit note, which is exactly like I record it already (a mirror image of how it was paid originally).

Thanks again for everyone's help.

 

[The Byre]

I asked our Mrs. M (she does the books here at Byre Towers) if she knew about the changes and she gave me one of her withering looks and told me "Of course I knew. What do you take me for? Anyway, I'm busy making tax digital, so don't disturb me!"

Thus chastened, I scurried away and looked for someone else to boss around. I made do with the one dog that actually listens to me. Running a company can be hard sometimes!