In Rio Tinto London Limited7, the FTT concluded that there was no evidence that services had been overcharged and, consequently, that a credit note issued on the basis that there had been a decrease in consideration under regulation 38 of the Value Added Tax Regulations 19958 (Regulation 38), in respect of pension scheme administration and investment management services, was not permitted.


Over a 37 year period, the appellant supplied investment management and administration services to a pension fund established for the benefit of its employees (the Fund). The appellant charged VAT on the entirety of fees it charged for these services. HMRC permits employers to re-charge third party costs without charging VAT on the administration element. As noted above (click here) HMRC’s Guidance provided that in cases where third party invoices do not differentiate between administration and investment management services, these may be split on a 30:70 basis.

The appellant issued a Fleming9 claim for the recovery of overpaid VAT on 31 March 2009 (the deadline for making such claims) pursuant to section 80, VATA. On 21 March 2010, HMRC were informed that the appellant intended to make a price adjustment pursuant to Regulation 38, whilst the claim under section 80, VATA remained pending. This was to enable a negative entry to be made in the appellant’s VAT account reflecting “a decrease in consideration for a supply”.

In December 2010, the Fund’s trustees were advised that the Fund had been overcharged for administration services, calculated at 30% of the total fees charged for the services. This would result in a repayment to the Fund of fees plus VAT. On 10 August 2011, the appellant issued a credit note for both the repayment and the overpaid VAT (circa £1m). The adjustment was recorded in the audited accounts for the year ended 31 March 2012. However, HMRC issued an assessment for the reclaimed VAT on the basis that there was no entitlement to a VAT credit in respect of the price adjustment.

FTT’s decision

In interpreting the meaning of a “decrease in consideration” under Regulation 38, the FTT applied Castle Associates10: a decrease in consideration can occur after the original supply has been made in circumstances where the parties agree between themselves that the original price is to be varied. The FTT’s examples of price adjustments that would fall under Regulation 38 included a post-sale price change in respect of a work of art for a dissatisfied purchaser, or a discretionary reduction of professional service fees.

In this case, however, it was not claimed that the original fees, net of VAT, had been wrongly charged to the Fund. There was no evidence that any dissatisfaction had been expressed with the level of the appellant’s charges. Consequently the FTT concluded that there was no price adjustment to justify a Regulation 38 credit note and the assessment was upheld. The repayment of the charges had simply been a vehicle to reclaim the VAT. The overpaid VAT should instead be remedied under section 80 VATA.


Whether a price adjustment will constitute a decrease in consideration pursuant to Regulation 38 will be a matter which the FTT will determine on an objective view of the facts, taking in to account the economic and commercial reality of the price adjustment. As demonstrated by the various examples referred to in the FTT’s decision, a price adjustment occurring after services have been supplied does not render it incapable of falling under Regulation 38, but this ought not to be used as an alternative to a VAT repayment claim.

To read the decision click here.