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Where a supplier offers a credit or contingent discount, if both parties agree the concession in paragraph 18.2.1 of VAT guide (VAT Notice 700), which allows both parties not to make VAT adjustments, the concession can be applied to reverse charge adjustments.

Where these conditions are not met, the supplier will need to issue a credit note to the customer with a note on it to show that the reverse charge applies and showing the reduction in the VAT their customer has to pay to HMRC. The supplier must include the reduction in the value of the supply on the VAT return for the period in which the credit note was issued.

In this situation, the customer will need to adjust the amount of output VAT due (as shown on the supplier’s credit note) by reducing the total VAT due in the VAT return for the period in which the credit note was issued. They will also need to adjust the amount of input VAT in the same VAT return, in accordance with any input tax adjustment calculations that apply (such as partial exemption methods). The customer must include the reduction in the value of the supply in the VAT return for the period in which the credit note is issued.

If the original supply was accounted for under a self-billing or authenticated receipts system then it will be for the customer rather than the supplier to generate the credit note.