VAT repayment proposal on late refunds ‘unfair’

An HMRC proposal to scrap compensation for delays to VAT refund payments is unfair and likely to harm the cashflow of affected businesses, a chartered body warns.

Currently, if a firm submits a VAT return to HMRC but officials fail to process it within 30 days, the firm may be entitled to a repayment supplement of five per cent of the reclaim amount.

Serving as an incentive for HMRC to repay promptly, the 30-day clock can be paused if the VATman makes “reasonable enquiries” into the return, and it resumes on their completion.

But under Finance Bill 2018/19 draft legislation, the government will remove the five per cent repayment supplement and instead pay ‘simple interest’ on HMRC repayment amounts.

Worse still for affected businesses than this meagre rate of 0.5% per annum, the Revenue will not pay any interest at all for the period in which it makes enquiries into the VAT return.

“[So] 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,” said the Chartered Institute of Taxation.

“[And] as VAT is an inherent part of a business’ cashflow, these changes could result in businesses incurring additional finance costs, or reduced investment, while they await their refund.”

Alan McLintock, chair of the institute’s indirect taxes sub-committee, says that under the proposal, there is seemingly “no incentive” for HMRC to progress VAT enquiries “quickly and efficiently.”

He also took issue with the Revenue’s justification of the proposal -- that it is designed to make interest on VAT consistent with other taxes.

“These restrictions on the payment of interest by HMRC do not apply with other taxes,” the CIOT said. “Instead of bringing consistency, these measures will bring complexity and unfairness to many businesses.”