VAT treatment for refunds or credit to supplier

[neilsolaris]

Hi,

I just want to check my understanding is correct regarding refunds to suppliers.

Basically, a supplier has accidentally paid an invoice twice. Both the supplier and us are VAT registered. I'm waiting to hear back if they'd prefer a refund or a credit on their account.

My understanding is that if we refund them, then I don't record VAT on the accidental payment received, as there wasn't any consideration. And likewise, when we refund them, we don't add on any VAT either.

However, if we give them credit on their account, then we record the payment as including VAT (the VAT being 1/6 of the amount received). Then that VAT gets paid in the quarter it was received, and the net amount can be used against any future payments.

Have I got that right?

Many thanks for your help.

 

[Scalloway]

Can the credit amount not just sit on their debtor account until you send them another invoice?

 

[lesvatadvice]

I agree with Scalloway's practical solution.
One technical point on overpayment - HMRC have been known to argue that an over-payment represents further payment for the same supply, and therefore expect VAT on it. Without digging any deeper, I think that has only been argued at First Tier Tribunal and HMRC have not, to my knowledge, indicated it is their policy.

 

[neilsolaris]

Thanks Scalloway and Les for your advice. And when I said supplier before, I sure you realized that I meant customer!

I'm waiting to find out if the credit amount can sit in their account or not. I guess it depends how soon we're going to be able to use their services. We'll let the customer decide on that.

I was going by the info on HMRC's website (see below), but I know you're an expert in the field, so naturally I'll follow whatever advice you give me.

I'm not 100% sure of how to account for it though. Let's say they agree for it to sit in their account. Do I charge VAT on 1/6 of the accidental extra payment, and let the remaining 5/6 sit in the customer account? And when they use our services again, we'll apply whatever's in their account first, but would they then pay VAT on the whole amount (even though VAT has already been paid on their credit balance)?

Many thanks.

HMRC artice

VAT treatment of overpayments
The VAT treatment is slightly different than the direct tax treatment it appears:

From HMRC's V1-3 Section 10 paragraph 10.17

10.17 Overpayments

The value of a supply is not affected if a supplier receives payment twice for a single supply due to a mistake by the customer. The value remains the original advertised price and cannot be increased simply because of an overpayment and so the additional payment is outside the scope of VAT. This applies whether or not the supplier makes provision to return the overpayment.

However, if the overpayment is not returned and is used to pay or part pay a future supply then it becomes consideration

 

[lesvatadvice]

Its interesting that HMRC are happy to include certain wording in their guidance and then argue something different at Tribunal!

Should he declare the output tax? If I were him, I would not, based on the guidance you quote. Put a copy of that guidance and perhaps this thread in his VAT file for reference.

 

[neilsolaris]

Many thanks Les. Yes, it's no wonder I was confused!

It's me who does the bookkeeping, so I'll follow your advice. Thanks again.