Following representations to the EU Commission, the Government has announced that legislation will be introduced to permit manufacturers to make VAT adjustments when ‘goodwill’ type payments are made directly to end customers.
Typically, manufacturers make ‘goodwill’ payments following complaints that goods produced by the manufacturer are faulty or damaged. Previously, HMRC had not permitted manufacturers to reduce the VAT they had paid on the original sale to a retailer or distributor when a later ‘goodwill’ payment was made to individuals further down the transaction chain. HMRC’s original view was that, as the manufacturer had no contract with the end customer (and therefore had no legal obligation to make a payment along these lines), then the payments should be treated as VAT free compensation.
In 2008, formal complaints were filed with the Indirect Taxes Directorate of the European Commission in Brussels. The basis of the complaint was that the UK VAT treatment did not conform to overarching EU VAT law. This led to HMRC agreeing to align UK legislation and practice with the EU VAT law provisions last year. The Budget announcement confirms that the relevant part of UK VAT law (Regulation 38 of the VAT Regulations) will be amended in 2014 following a consultation process aimed at identifying the precise circumstances under which manufacturer goodwill payments take place.