VAT: Manufacturers’ ‘cash back’ payments

This Revenue and Customs Brief article explains the VAT treatment of ‘cash backs’ and what businesses should do if they pay or receive ‘cash backs’, or have paid or received them in the past.

Background

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 – mostly in recognition of the volume of purchases. 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.

HMRC has become aware that some businesses have been accounting for ‘cash back’ payments incorrectly. Some manufacturers have reduced their output tax, some have not. Some have made retrospective claims for overpaid output tax, but the recipients of those ‘cash backs’ have not necessarily reduced their input tax.

VAT Treatment

The treatment of payments of this nature was laid down by the European Court of Justice (ECJ) in two cases: Elida Gibbs (C-317/94) and Commission v Germany (C-427/98). HMRC's policy is set out in VAT Notice 700/7 Business Promotion Schemes Section 7.5, which states that 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.

If you are VAT-registered and you receive a ‘cash back’ that relates to a taxable supply, this reduces the taxable value of your purchase, and you must reduce your input tax in the proportion in which you claimed it.

Way forward

Until 1 March 2007, providing

• 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 their output tax in respect to 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 their input tax. In cases of doubt they must determine the VAT treatment applied by the manufacturer and apply the guidance given.

From 1 March 2007, businesses should correctly 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.

If you are VAT-registered and you receive a ‘cash back’, this reduces the taxable value of your purchase, and you must reduce your input tax accordingly. HMRC will assess for over-claimed input tax where these adjustments are not made.

Any ‘cash back’ payment from manufacturer to customer, that does not affect the wholesaler, does not require the wholesaler to make any VAT adjustment.

Cross border ‘cash backs’

Where ‘cash backs’ are paid between businesses in different EU member states (MS), no VAT adjustments should be made. This means in practice:

• where a UK manufacturer pays a ‘cash back’ to a recipient in another MS, the manufacturer cannot reduce his output tax; and
• where a UK recipient receives a ‘cash back’ from a manufacturer in another MS, no input tax deduction is required by the recipient.

Change of liability in the supply chain

Where the VAT liability of the goods changes in the supply chain (e.g. where a charity buys certain goods zero-rated from the wholesaler which were standard-rated for VAT when supplied by the manufacturer), 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.

Issued 6 February 2007.