.png)
.png)
The term 'cash back' refers to a payment usually made by a manufacturer directly (or via a recovery agency) to the customer of a wholesaler or retailer. Similar payments may also be made under manufacturers' discount schemes, or may be referred to as volume bonuses or described in similar terms. Such payments occur outside the direct supply chain and as a result credit notes should not be used.
The treatment of payments of this nature was laid down by the European Court of Justice in Elida Gibbs v CCE (C-317/94) [1996] STC 1387 and EC Commission v Germany (C-427/98) [2003] STC 301. Manufacturers are entitled to reduce the output tax on their sales in respect of the cash backs, provided that they charged and accounted for VAT on their original supply. Until 1 March 2007, provided that:
- manufacturers have not reduced their output tax, and
- recipients have not reduced their input tax, and
- both parties have agreed to make no adjustments for the past, present and future,
HMRC will not require adjustments to be made in these circumstances, will not assess for over-claimed input tax, and will consider withdrawing any such assessments that have already been raised, subject to the usual three-year limitation. If manufacturers break the agreement, change their minds at a later date, and do adjust their output tax, HMRC will assess recipients in line with assessment time limits. Where manufacturers have already adjusted their output tax and recipients have failed to adjust their input tax, HMRC will assess for over-claimed input tax, or defend assessments already issued.
In practice, where a manufacturer has not made a claim to reduce its output tax in respect of any cash back payments made prior to 1 March 2007, HMRC would assume an agreement between the parties. If, however, a manufacturer subsequently makes a claim for periods prior to 1 March 2007, HMRC continue to reserve the right to take action in respect to any failure to adjust input tax by the recipient.
A recipient of a cash back payment prior to 1 March 2007 remains responsible for identifying if there is a need to reduce input tax. In cases of doubt the recipient must determine the VAT treatment applied by the manufacturer and apply the guidance given.
From 1 March 2007, businesses should make the necessary adjustments as outlined above. Businesses providing cash backs are entitled to reduce their output tax provided that they charged and accounted for VAT on their original supply.
Any cash back payment from manufacturer to customer, that does not affect the wholesaler, does not require the wholesaler to make any VAT adjustment.
Where cash backs are paid between businesses in different EU Member States, no VAT adjustments should be made. This means in practice:
- where a UK manufacturer pays a cash back to a recipient in another Member State, the manufacturer cannot reduce his output tax; and
- where a UK recipient receives a cash back from a manufacturer in another Member State, no input tax deduction is required by the recipient.
Where the VAT liability of the goods changes in the supply chain, manufacturers cannot reduce their output tax in relation to the 'cash back' paid to the charity. Where the cash back relates to goods that were supplied VAT-free to a business receiving the cash back, no adjustments should be made.
HMRC Brief 08/07, 6 February 2007
