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 enquire 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.
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, the interest it would receive will be £12.50.
The Chartered Institute of Taxation (CIOT) called on the Government to abandon its plan to deny business’s interest from HMRC for the period in which the Revenue undertakes an inquiry.
While the CIOT’s lobbying succeeded in getting the Government to amend Finance Bill 2021, it wants a rethink on its plans to end the repayment supplement amid fears of potential damage to a business’s cashflow.
The CIOT welcomed further harmonisation of the interest and penalty regimes, but argued the timing of the change had left little time for MPs to scrutinise it.
Richard Wild, head of tax technical at CIOT, said:
“Removing the VAT repayment supplement has not been well publicised and seems to be happening below the radar.”
“HMRC’s annual report shows they repaid £92.9bn in VAT in 2019/20 – over six times more than income tax and National Insurance contributions. In some cases, delays in processing repayments could be devastating for the businesses concerned.”