CIOT welcomes govt’s VAT repayment change but concerns remain

The Chartered Institute of Taxation (CIOT) has welcomed the government’s decision to amend the current Finance Bill to pay interest to businesses where VAT repayments are delayed due to an enquiry by the tax authority.

However, the CIOT is also calling for a wider rethink of plans to end the VAT repayment supplement, having claimed this could be devastating for some businesses.

Repayments of VAT are usually made within 30 days of HMRC receiving a business’s VAT Return, although HMRC can enquire into the VAT return before processing the repayment. If HMRC does not authorise the repayment within 30 calendar days, the business currently receives compensation from HMRC – known as a ‘repayment supplement’. The repayment supplement is 5% of the repayment, or £50 if greater, and is paid automatically by HMRC alongside the VAT repayment itself.

The government is seeking to pass legislation in the Finance Bill which replaces this 5% supplement with interest payments instead.

In a written submission to MPs, the CIOT called for a “specific rethink” to the government’s plan to not pay interest for the period that HMRC undertake an enquiry – and during last week’s committee stage, the government accepted this argument and amended the Bill accordingly.

“We are pleased that the government has abandoned the proposal which would have denied businesses interest from HMRC for the period that the tax authority undertakes an enquiry,” commented CIOT head of tax technical, Richard Wild.

“This would have been unfair to the businesses concerned. And it would have removed the incentive for HMRC to undertake enquiries quickly and efficiently, and make VAT repayments in a timely fashion.

“HMRC’s processing times are currently so poor in some service lines that taxpayers are waiting many months for their tax refunds. We were concerned that, in the absence of any significant incentive to process them in a timely fashion, these delays would extend to VAT refunds, leaving businesses without funds which often form part of their working capital, putting some businesses in severe financial difficulty.”

However, the CIOT also indicated it remains concerned about the broader plan to replace the 5% repayment with interest-only payments – especially as repayment interest is currently just 0.5% per annum.

These changes will take effect by way of regulations for VAT taxpayers for accounting periods beginning on or after 1 April 2022.

Wild added: “We are concerned that the removal of repayment supplement has not been well publicised and seems to be happening somewhat ‘below the radar’.

“While we generally welcome harmonisation of the interest and penalty regimes, and that repayment interest will become available in a wider range of circumstances than currently, there is no mention of removal of repayment supplement in the Finance Bill documents as this is to be done via regulations later this year.

“Effecting the change in this way foregoes a proper debate, and deprives MPs of the opportunity to focus on the unacceptable delays currently being faced by many of their constituents in their dealings with HMRC.”

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