VAT return repayments: HMRC checks no longer bound by time restraints
For VAT return periods commencing after 1st January 2023 HMRC is no longer incentivised to make prompt VAT repayments due to businesses.
Previously, the ‘Repayment Supplement’ regime imposed a financial penalty for HMRC (and an equal windfall for businesses) if more than 30 days were taken to process and make a repayment. HMRC were entitled to ‘stop the clock’ in order to make ‘reasonable enquiries’ but otherwise were liable to add a supplement, calculated at 5% of the VAT repayment due. This meant that HMRC would apply great care to ensure that they were not liable to make such payments. Therefore, the ‘pre repayment credibility query’ was designed as a quick and focussed means of HMRC confirming that a business was entitled to receive the repayment that the VAT return had shown was due to them.
All of this has changed with the latest re-write of the legislation governing penalties and interest.
The quid pro quo is that daily interest is payable instead by HMRC (rather than a flat supplement). However, this interest is paid at a very low rate; ‘Repayment interest’ is paid to businesses at the Bank of England base rate minus 1%, with a minimum rate of 0.5%. This is in contrast to ‘Late payment interest’ on sums due from businesses, which is calculated at the Bank of England base rate plus 2.5%.!
This looks like it’s heads they win and tails they win!
For any cash-strapped business which needs its VAT in order to survive or to make investments in its future this is a very retrograde measure. The danger is that HMRC can simply withhold repayments indefinitely without having any sanction and without a business having any redress.
The rate that HMRC are ‘borrowing’ from the taxpayer on withheld repayments is below the bank base rate, which might suit their needs!
We have already seen evidence of HMRC starting what appeared to be an enquiry into a VAT repayment due on a specific VAT return for a well-established business, only for it to evolve into a full ‘compliance check’, with the repayment remaining unpaid. Previously, the incentive and normal practice would be for HMRC to satisfy themselves with the bona-fides of the specific repayment return, release the repayment (to avoid having to a pay a Repayment Supplement) and then to proceed with any compliance checks deemed necessary (given that they have a four-year window to make any adjustments for previous returns)
The only positive change is the introduction of a new facility which enables a business to upload documents supporting its repayment claim if it is submitting its first VAT return or it has received a letter from HMRC stating its VAT return is already undergoing pre repayment checks. The facility is located at:
https://www.gov.uk/guidance/send-details-to-support-your-vat-repayment-claim?utm_medium=email&utm_campaign=govuk-notifications-topic&utm_source=c4651be0-44d1-4b93-ab0d-4a5484ac958e&utm_content=immediately
