The Chartered Institute of Taxation (CIOT) has said the proposed scrapping of compensation for delays to the payment of VAT refunds by HMRC is unfair and likely to harm affected business’ cash flows.
If a business submits a VAT return to HMRC, claiming a repayment, but the tax authority does not process the return within 30 days, the taxpayer may be entitled to a repayment supplement of five per cent of the amount of the reclaim.1 This 30 day limit acts as an incentive for HMRC to make repayments in a timely fashion. If HMRC make enquiries into the return, the 30 day limit is paused to allow HMRC to make reasonable enquiries, but it resumes again when the enquiry has completed.
The Government’s proposal is to remove the five per cent repayment supplement and pay simple interest (currently at 0.5 per cent per annum) on amounts repayable by HMRC. HMRC would not pay any interest for the period in which the tax authority makes enquiries into the VAT return, or if there are other outstanding VAT returns.2
Alan McLintock, Chair of CIOT’s Indirect Taxes Sub-committee, said:
“Under this proposal, if a repayment return is correct, but HMRC undertake lengthy enquiries, for say, six months, the business will get its repayment paid six months late but will receive no interest or recompense whatsoever. As VAT is an inherent part of a business’ cash flow, these changes could result in businesses incurring additional finance costs, or reduced investment, while they await their refund.
“Indeed, there appears to be no incentive for HMRC to progress enquiries quickly and efficiently.”
The CIOT was responding to a consultation on draft legislation for Finance Bill 2018-19.3
HMRC say the change is to make interest on VAT consistent with other taxes. However ,CIOT disputes that this would be the case.
Alan McLintock explained:
“These restrictions on the payment of interest by HMRC do not apply with other taxes. Instead of bringing consistency, these measures will bring complexity and unfairness to many businesses.”
Notes for editors
- The precise conditions for repayment supplement are set out in VAT Act 1994, s79, and in VAT Notice 700/58.
- There are other restrictions, such as where HMRC are dealing with arithmetic errors, or if there is an outstanding request for security.
- The CIOT’s submission can be read here.
- VAT registered businesses typically submit a VAT Return to HMRC every three months. This period of time is known as a ‘prescribed accounting period’. Businesses whose input VAT on their purchases and expenses exceeds the output VAT due on their sales are entitled to receive from HMRC a refund of the amount that their input VAT exceeds their output VAT.