One of our clients recently invoiced for a supply of project management services, but the project proved less complex and time-consuming than expected.
As a result, as this is likely to be a regular client, he is going to agree that the price should be reduced, and a partial refund given. He intends to issue a credit note; or does he have to go back and cancel the original invoice and issue a new one now?
All a credit note really does is document an underlying adjustment. A credit note for the adjusted sum is perfectly appropriate in this situation. The time of supply rules are not affected by the issue of credit notes, so the tax point on the original invoice remains unchanged. Output tax remains due on the higher value until such time as the adjustment is made.
Since 1 September 2019 it has been a requirement that a credit note reflecting a reduction in value must be issued within 14 days of the decrease in consideration, and the timing of that decrease is defined by Regulation 24(B) (b), which states: “a decrease in consideration occurs when the supplier pays the amount of the decrease to the recipient of the supply or to any other person who is entitled to receive the payment.”
A payment may be a straightforward refund, or it could also be an offset against an existing liability.
This means that the adjustment to our client’s output tax should be made no earlier than the date the refund is made, and no later than the date of issue of the credit note, which must be within 14 days. His client will need to adjust his input tax at the same time.
HMRC issued Brief 06/2019 to publicise the amendments to the legislation and their new policy.
This brief also sets out the revised requirements for an increase in consideration, including the requirement to account for the additional output tax in the period in which the increase is agreed, issue a debit note rather than a supplementary invoice, and issue the debit note within 14 days of the price increase being agreed. It also sets out the required contents of debit notes and credit notes.[1]
[1] Reproduced with permission of Croner Taxwise