No refund, no VAT repayment

Output tax on credit notes when the customers received no refund

The taxpayers sold stamp duty land tax schemes to individuals and received an advance fee for their services. These failed for various reasons. The contracts between the taxpayers and their customers stated that a full refund would be given if the arrangements were unsuccessful. The taxpayers issued credit notes to the customers but they received no refunds because the companies went into either administration or liquidation.

The taxpayers said the credit notes reflected a ‘decrease in consideration’ of the original invoices as a result of the scheme’s failures (VAT Regulations 1995 reg 38) and claimed repayment of the output tax. They said the credit should be based on the amount the customer was liable to pay (nil) rather than the original fee. HMRC refused saying there could be no reduction in output tax because there had...