In cases where the manufacturer, rather than the retailer, makes such a refund to the end consumer, HM revenue & Customs (HMRC) had always refused to allow the manufacturer to adjust its VAT. We had always thought that the Elida Gibbs decision (Case C-317/94) should apply here, as the customer has ultimately paid less for the goods and as such the total VAT declared should reflect this reduction. HMRC had released a consultation document asking how such refunds work in practice, with a view to changing the UK law on post supply adjustments. However, the Commission, who appear to agree with our analysis, seems to have lost patience with HMRC and have commenced infringement proceedings.
In the consultation it is clear that HMRC want to limit the scope of refunds that will result in a VAT adjustment. In particular HMRC have listed two types of manufacturer refunds which they do not accept as giving rise to an adjustment.
- Payments to third parties to repair the goods and free supplies of parts to effect a repair. Essentially, if the customer has not received a refund against the consideration he or she paid for the goods then no adjustment should be made.
- Payments to customers covering the cost of repairs by third parties. This is “out of pocket” compensation to the consumer and not a reduction in the original cost of the goods.
We think there are alternative analyses that have equal or greater merit. Put in its simplest commercial terms, the manufacturer payment recognizes the fact that the goods were not “fit for purpose” and the way it is made and what it is used for should have no bearing on this.
There are also other circumstances, omitted from the consultation, where we believe that the manufacturer should be able to adjust its VAT. These include situations where a third party meets the manufacturer’s liability – e.g. an insurer or a credit card company. In the same way that consideration from a third party is still a consideration, a refund by a third party on the manufacturer’s behalf is still a refund. The manufacturer will still ultimately have met a cost here, through its insurance premiums or by way of loss indemnity payments to the credit card provider.
One interesting point is that HMRC seem to accept that where the refund is greater than the amount originally received by the manufacturer but still less than the amount paid by the end consumer, the entire refund should be viewed as an adjustment to the consideration paid by the end consumer. Clearly this could lead to the manufacturer adjusting its VAT by more than it has declared on its supply, leading to a negative VAT accounting position – this seems counter intuitive to all VAT advisers!
Finally, there are also issues around cross border supplies and cash backs funded by intermediaries, where case law is still developing (see the Advocate General’s opinion in Ibero Tours C-300/12). This is a complicated area where new principles continue to emerge as the search for VAT neutrality continues.