HMRC will pay 0.5% annual interest on delayed VAT claims from April 2022. But the end of the repayment supplement scheme will be a bigger loss.
Most advisers are aware that if HMRC delays repaying a VAT return claim by more than 30 days (plus additional days to give it a reasonable length of time to make enquiries) it will pay a repayment supplement equal to 5% of the repayment amount or £50, whichever is greater.
There is no supplement paid, however, if the claim is significantly adjusted because of errors made on the return. The government’s intention is that the repayment supplement scheme will be scrapped for VAT periods beginning on or after 1 April 2022. But that is not the end of the story.
A recent amendment to Finance Bill 2021 (Amendment 19) means that HMRC will pay interest if it delays a repayment VAT return to check the figures – effective for periods beginning on or after 1 April 2022.
This is great news, you might think, but what is the bottom-line benefit to a business? And is this a fair trade-in for the loss of the repayment supplement scheme?
Widgets Ltd has purchased a big piece of equipment and submitted a repayment VAT return for £100,000 mainly due to input tax claimed on the equipment.
The return was submitted on time but due to inefficient delays caused by the HMRC reviewing officer, it was not repaid for four months. With the repayment supplement regime, the company will currently get £5,000 (£100,000 x 5%) but only £125 interest after April 2022.
The annual interest rate paid by HMRC under the new regime will be 0.5%, assuming the existing rate is unchanged. (£100,000 x 0.5% x 3months/12months).
Interest on errors
So, to move the story forward, what would be the situation if the directors of Widgets Ltd forgot to claim input tax on the new equipment, and spotted the error 12 months later when preparing year-end accounts?
A voluntary disclosure will be submitted to HMRC to correct the error but it will not benefit from any interest payment from HMRC at the moment, even though the taxpayer has supported the government’s working capital for a year.
But that will change from April 2022 as part of the government’s ‘interest harmonisation’ strategy, bringing VAT into line with other taxes. But the annual rate will still be 0.5%.
The only other time that HMRC will currently pay interest to a business is if a claim or refund has been delayed due to official error on the part of HMRC (s78, VATA1994).
For example, if an officer ruled in writing that ‘product X’ sold by a particular business was standard rated, and it was later found to be zero-rated, leading to a large VAT refund to the taxpayer, then HMRC would pay interest. This will be simple rather than compound interest.
The legislation aims to give ‘commercial restitution’ to a business that has suffered a delay getting its VAT refund.
A useful definition of ‘commercial restitution’ in the HMRC VAT manual VSIM1000: “compensation to the party deprived of the use of the money it is owed.”
It’s not clear this is achieved if a business has to pay 7% annual interest on a bank overdraft while waiting for a VAT refund – only getting 0.5% interest back from HMRC!
The proposed abolition of the repayment supplement scheme next year will be a big blow to taxpayers who suffer from unnecessary HMRC delays.
As well as the financial cost of a delayed VAT repayment, which an interest refund is designed to compensate, there are many other costs incurred by a business chasing a repayment, as we all know: professional fees, the cost of time delays waiting for HMRC to answer the phone, telephone bills etc.
HMRC officers have a bigger incentive to get cracking with an enquiry if a big 5% repayment supplement will be paid from the treasury coffers (a black mark against the officer), compared to a miserly 0.5% interest.