VAT-registered businesses could face more cashflow disruption if a measure to replace the VAT repayment supplement gets the go-ahead from next spring.
The 5% VAT repayment supplement is set to be replaced with the 0.5% repayment interest rate for accounting periods beginning on or after 1 April 2022.
VAT repayments are usually made within 30 days of HMRC receiving a business's VAT return, but the tax authority can launch an inquiry into the VAT return before processing the repayment.
If HMRC does not authorise the repayment within 30 calendar days, the business receives compensation known as a repayment supplement. Currently, this is 5% of the repayment (or £50 if greater) and is paid automatically by HMRC alongside the VAT repayment.
How might it work from April 2022?
The measure is part of the Government's plan to align the interest and penalty regimes for UK VAT with other taxes, including income tax paid via self-assessment and corporation tax.
Harmonising these interest and penalty regimes will ensure repayment interest becomes available in a wider range of circumstances than it currently is, although it will be worth considerably less.
For example, if a VAT repayment of £10,000 is delayed by three months, the VAT-registered business might currently be entitled to a £500 repayment supplement. Under the new proposal, it would receive interest of just £12.50.
By harmonising interest rules across these different taxes, the Treasury estimates to raise an additional £155 million a year by 2024/25 so the impact will be felt by taxpayers.
The Chartered Institute of Taxation (CIOT) said the removal of the VAT repayment supplement had "not been well publicised" and that it "seems to be happening somewhat below the radar".
Time for another U-turn?
Having successfully lobbied for an amendment to Finance Bill 2021 already, the CIOT hopes there's still time for the Government to abandon its plan to deny businesses interest from HMRC for the period in which the Revenue undertakes an inquiry.
The CIOT wants a rethink on plans to end the repayment supplement amid fears of potential damage to a business's cashflow, while also arguing that the timing of this measure had left little time for MPs to fully scrutinise it.
Richard Wild, head of tax technical at CIOT, said:
"There is no mention of removing the 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.
"VAT really is different in this respect. It is much likelier that a business will have to pay it upfront and claim it back than with other taxes. It is also more likely to be big in terms of the size of the business.
"HMRC's annual report shows they repaid £92.9 billon in VAT in 2019/20 - over six times more than income tax and National Insurance contributions.
"In some cases, delays in processing VAT repayments [from 1 April 2022] could be devastating for the businesses concerned."
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