Under current rules, if a VAT return shows that a repayment is due then HMRC should repay within 30 calendar days of receiving the business’s VAT Return. If the repayment is not authorised within that time limit, the business will receive compensation in the form of a ‘repayment supplement’ being five per cent of the repayment (or £50 whichever is the greater), paid automatically with the VAT repayment. The return must have been submitted on time and the refund amount or amount shown on the return as due by way of payment must not exceed the actual payment by more than five per cent or £250 whichever is greater. Should HMRC decide to make enquiries into the claim, the VAT repayment should again be made within 30 days, but this time plus the number of days spent making ‘reasonable enquiries.’ If the claim is subsequently ‘significantly adjusted’ because of errors made on the return, no supplement is paid.
The repayment supplement scheme is to be scrapped for VAT periods beginning on or after 1 January 2023 and replaced by an interest payment scheme. Under this scheme should HMRC delay issuing the repayment because the figures are being checked then interest will be paid but at the annual interest rate (currently 0.5%).
This amendment of the rules will have the greatest impact in the situation where a VAT return has been submitted on time but HMRC does not make the repayment within the 30 days due to the figures being checked. The difference in amount of restitution for the taxpayer between the pre and post January 2023 schemes has no comparison.
Another situation that could arise is that should an error be made in the return and a voluntary disclosure made e.g. if a business forgets to make a claim for input tax on some new equipment, only realising their error months later when preparing year-end accounts, then currently no interest is received on this repayment. Post January 2023 interest will be made but at the same annual rate 0.5%.
The only other time that HMRC pays interest under a VAT claim is if a claim or refund has been delayed due to official error on the part of HMRC. An example of this instance would be where an officer rules that a particular product has been wrongly designated as standard rates and subsequently it was found that it should have been zero-rated, leading to a large VAT refund to the taxpayer. Interest would then be paid again at the annual rate of 0.5% and using ‘simple’ rather than ‘compound’ interest.
The reason for these rule changes is in readiness for ‘Making Tax Digital’ so that there is harmonisation across the board of all taxes. However, whilst harmonisation of interest payable and repayable ensures a fairer and more coherent regime, the situation will have a more significant impact on VAT registered businesses that are in a refund position. During the time if HMRC is making their enquiries in the intervening period the business looking for a VAT refund is left with an absence of funds which often form part of a business’s working capital. In addition, those of the more cynical disposition may be concerned that without the 5% supplement ‘levy’ there is less immediacy for undertaking enquiries in a timely fashion as the ‘penalty’ for doing so is no longer there.