BIM40186 - Specific receipts: refunds of sums paid as VAT: what if the original VAT-paying customer is refunded?
This is direct tax guidance; for indirect tax guidance, refer to VAT Guidance.
VAT is a transaction-based tax. In some cases, when a trader receives a refund of a sum paid as VAT, they are able to identify the party who was the original customer to the particular transaction. »Ê¹ÚÌåÓýapp trader may decide to pass an appropriate amount on to that original customer. This payment is an allowable deduction for the trader. As a result the trader is only taxable on the net amount of the refund that they retain.
»Ê¹ÚÌåÓýapp original customer is taxable on the sum paid on to them, if they were able to deduct the original expenditure. »Ê¹ÚÌåÓýapp refund is an adjustment to an allowable trading expense, see BIM40166.
Example
A Ltd provides landscaping services to property developers. Following the decision in Rialto Homes plc VTD 16340, their major customer, B Plc suggest that A Ltd lodge a claim for a refund of sums wrongly paid as VAT.
In September 2010, A Ltd receives a refund of £250,000 and agrees to pass £150,000 on to B Plc, the VAT in respect of work carried out by A Ltd for B Plc.
»Ê¹ÚÌåÓýapp directors of A Ltd recognise the receipt of £250,000 in the accounts for the year ended 31 December 2010, together with a deduction for the £150,000 paid on to B Plc. »Ê¹ÚÌåÓýapp balance of £100,000 forms part of the taxable profits of A Ltd.
B Plc had not been able to deduct the VAT on the original expenditure on landscaping because the VAT rules do not allow this. »Ê¹ÚÌåÓýapp landscaping costs had therefore been included on a VAT inclusive basis. »Ê¹ÚÌåÓýapp £150,000 is recognised in calculating the taxable profits of B Plc in their year ended 31 March 2011, see BIM40166. »Ê¹ÚÌåÓýapp accounts for the earlier year are not re-opened.