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HMRC internal manual VAT Supply and Consideration

VATSC06640 – Consideration: Change in Consideration: ECJ judgments

  • The European Court of Justice has dealt with cases involving the adjustment of consideration, with Elida Gibbs (C-317/94) and Commission v Germany (C-427/98) being of particular significance.
  • In Elida, a UK company manufactured toiletries that were sold through retail outlets, with customers having no direct relationship with the manufacturer. The case looked at two scenarios involving money-off coupons and refund coupons, and Elida sought to adjust the Output tax accounted for on its sales to wholesalers by the amounts repaid in both scenarios. HMRC argued that Regulation 38 did not apply, but the ECJ concluded that the principle of “tax neutrality” meant that VAT accounted for must equate to what was paid by the consumer adjusted for any reductions. The manufacturer was entitled to credit their Output tax to reflect the reimbursement or refund made.
  • In Commission v Germany, the ECJ confirmed Elida’s principle and decided that the refund to the retailer was further consideration for the retail supply to the consumer. The ECJ also considered the position where the retail sale was exempt (zero-rated) from VAT but the previous supply chain was fully taxable and concluded that any VAT adjustment must be at the prevailing VAT rate of the final retail supply. A VAT registered consumer who receives a refund must adjust their input tax.
  • HMRC revised its policy on business promotion reimbursements following Elida.

Source HMRC

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