HMRC has announced a proposal to abolish compensation for any delays to VAT refund payments. The move has been called unfair by a chartered body who warned that the move was likely to damage the cashflow of businesses.

At present if a firm presents a VAT return to HMRC and the HMRC officials do not process it within 30 days the company might be eligible for a repayment of 5 percent of the reclaim sum.

This serves as an incentive to HMRC to repay promptly, but the 30-day deadline can be extended if HMRC has to make reasonable enquiries into the return. Once those enquiries have been completed HMRC must once again make the repayment within a reasonable time.

However, the Finance Bill 2018/19 draft legislation contains a proposal to remove the 5 percent repayment supplement and instead says that HMRC should make a simple interest payment.

This would mean that repayments would drop to a rate of around 0.5 percent. In addition, HMRC will not have to pay any interest on the money whilst enquiries are taking place.

The Chartered Institute of Taxation said that if a repayment return is correct, however HMRC take lengthy enquires for around six months, the business gets the repayment paid six months later but they won’t receive any interest or compensation. He then continued by saying that seeing as VAT is a fundamental part of a business’ cashflow, the changes could end in a business incurring additional financial costs.