HMRC have amended and included new guidance on the VAT treatment associated with returned goods in its VAT Manuals.
HMRC’s guidance refers to a retailer seeking to treat returned goods as a cancellation of the original supply, which it notes, has implications for money retained where a full refund was not given. The guidance goes on to consider a number of different refund scenarios. Generally these allow for a Daily Gross Takings (DGT) reduction equivalent to the value of the refund, whether the refund is made in cash or a voucher. However, the guidance does not allow for a reduction where there is no receipt or evidence linking the reduction back to the original supply. A new page sets out HMRC’s technical analysis of their position on cancellation of a supply.
VAT Supply and Consideration - Returned goods
HMRC’s view is that once a supply of goods has been made for VAT purposes, it cannot subsequently be cancelled. The original supply remains and a subsequent return and refund results only in a reduction in the consideration of the original supply (including to £0 for a full refund). However, HMRC’s clear view is that any money retained by the supplier when goods have been returned is still consideration for the returned goods – and VAT is required to be declared on this income if the goods are positive rated.
With regards purchases where there is no proof of purchase, the guidance states that ‘such a transaction should be treated as a purchase of goods from the customer by the retailer for a consideration. Subject to the scheme conditions being met the second-hand margin scheme could apply to the resale of the goods.’ This section ends with an example of a partial refund and exchange.
Basic principles and underlying law - Cancellation of a supply
This new guidance cites the Liverpool Commercial Vehicles Ltd  High Court decision and the Almos (C-337/13) Court of Justice of the European Union (CJEU) judgment to support HMRC’s position.
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