HMRC has announced its intention to do away with the 5% repayment supplement payable when it repays VAT late; it is not good news and I am quite cross.
Background
What is the repayment supplement?
Repayment supplement is a form of compensation paid in certain circumstances when HMRC does not authorise payment of a legitimate VAT claim within 30 days of receipt of the VAT Return.
If a business submits a repayment return and HMRC does not make the repayment within 30 days, it is required to add interest at 5% to the amount of the claim. A repayment claim arises when input tax is greater than output tax for a period. This may be due to many factors, such as; sales being VAT free, a large VAT bearing purchase or an adjustment to previous declarations. The 30 day period is paused for “the raising and answering of any reasonable inquiry relating to the requisite return or claim” by HMRC.
Additionally, HMRC may make an extra ex-gratia payment to make good any serious disadvantage suffered if a repayment is delayed to an exceptional extent, and the repayment supplement is less than the interest which might otherwise have been earned.
The proposal
In a consultation on draft legislation for Finance Bill 2018-19 the government has announced that it intends to replace the 5% supplement with payment of simple interest. This currently stands at 0.5% pa and therefore a substantially lower payment would be due to a taxpayer.
Technical
The relevant legislation covering the repayment supplement is contained in The VAT Act 1994 Section 79
Commentary
The entire point of the supplement is to focus HMRC’s mind on making the payment at the appropriate time, just as the default surcharge does for submitting a VAT return and paying VAT for a business. This is fair. To withdraw the repayment supplement does away with any incentive for HMRC to make repayments on time and this must represent an imbalance. To effectively withhold money from a business to which it is properly entitled is plain wrong. It can often significantly impact on cashflow and cause serious problems for a business.
It is quite often a fight to obtain a repayment supplement and in my personal experience HMRC do as much as possible to resist making these payments. It is no surprise that they are trying to wriggle out of their responsibility.
Let us hope that representations to HMRC against this plan are successful.
Right, I’m going to cool off…