Accounting for VAT on unfulfilled supplies

What is an unfulfilled supply?

It is defined by HMRC as:

“… where a customer doesn’t use a service or collect goods … they have paid for.”

Why is this important?

Until now, December 2018, HMRC allowed the VAT treatment of the payments received to be changed. The supplier could recover, from HMRC, any VAT it accounted for on an advance payment. The reason this was allowed was no supply had been made, and it was therefore believed that no VAT was due.

Following the decision of the CJEU in two cases this year, HMRC has concluded that its policy was wrong, and the VAT accounted for on payments received should not have been recovered by the taxpayer.

From 1 March 2019, HMRC will not allow the reclassification of payments for unfulfilled supplies. This appears to be only for retained payments. What seems to be unclear is how one deals with a case where some or all of the payment is refunded.

If a business has not made adjustments to the VAT paid in the past, HMRC’s view is that it can no longer do so as it has applied the correct interpretation of the law. HMRC accept that a business may reclassify payments up to 28 February 2019.

The announcement was announced in a Revenue and Customs Brief published by HMRC on 14 December 2018.

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