How to handle overpayment of VAT

By human error or technology glitch, making incorrect VAT payments is not unheard of. But how do you go about claiming back overpayments of VAT? This guide will cover how overpayments can occur, how to claim a VAT refund from HMRC and what the implications are for interest on overpayments.

How do VAT overpayments occur and how should they be rectified?

VAT overpayments may occur by way of businesses accounting for VAT that isn’t due, either through calculation error or multiple payment. The method to rectify an error on a VAT return that has already been submitted depends on the net value of the error. The net value is calculated as the difference between the tax amount due to HMRC and the total amount due to a trader.

For errors with a net value not exceeding £10,000, or with a net value between £10,000-£50,000 but not exceeding 1% of net outputs on the VAT declaration, traders should correct the error by adjusting their VAT account and including the value of the VAT adjustment on their current VAT return.

Where the difference is greater than £10,000 and over 1% of the VAT return declaration for the period in which the error was discovered, traders are not able to make the adjustment on their VAT account, but should notify HMRC by submitting an error correction form – VAT 652.

Any traders unable to access the form should write to HMRC, disclosing details about how each error occurred; the VAT accounting period to which the error relates; whether the error concerns input tax or output tax; if VAT was underdeclared or overdeclared in each VAT period; how the underdeclared or overdeclared VAT was calculated; whether the errors resulted in a VAT payment that wasn’t due; and the total amount to be adjusted.

Traders are only able to make VAT return adjustments or notify HMRC of error corrections if the errors fall within accounting periods inside HMRC’s time limit of four years.

When should errors be corrected?

Errors should be corrected as soon as they are discovered, or risk having a penalty applied.

How to claim a VAT refund in the case of overpayment

There are two ways in which traders can claim a refund for the overpayment of VAT.

Firstly, traders can adjust a tax return if the error has a net value not exceeding £10,000, or a net value between £10,000-£50,000 but not exceeding 1% of net outputs on the VAT declaration. If the net value is greater than £10,000 and over 1% of the VAT return declaration for the period in which the error was discovered, traders should notify HMRC through form VAT 652.

Penalties and interest

Penalties

Errors will be subject to a penalty if they are careless or deliberate. Non-careless errors should be adjusted once discovered otherwise they may be treated as careless, leading to penalties. HMRC may consider a reduction in penalty if they are notified of the careless or deliberate error or inaccuracy.

The tax authority has said that the majority of errors will not be careless or deliberate so no penalty will be due. To determine whether the error was careless, HMRC will review whether the person has “taken the care and attention that could be expected from a reasonable person taking reasonable care in similar circumstances”.

Interest

HMRC will not usually pay interest for VAT mistakes made by traders themselves. Interest can be claimed from HMRC if too much VAT has been paid as a result of an HMRC mistake.

If the HMRC mistake has resulted in too much VAT being paid, too little VAT being reclaimed or a delayed payment from HMRC, 0.5% interest can be claimed. This is applied to the period from when the VAT was overpaid to the date the payment is authorised.

Interest claims must be submitted separately to a repayment claim and must include details on why interest is owed. Claims must be made within four years of the date of repayment authorisation.

Interest received is considered taxable income.

In cases where a trader’s customers have paid too much VAT as a result of an HMRC mistake, the trader must repay the interest paid to their customers. The interest amount must be returned to HMRC within 14 days if the trader is unable to make contact with the customer to make the repayment. Traders can obtain a printout of the statutory interest calculation from their local VAT Business Advice Centre to help them to determine how much interest is due to customers for a particular period.

Unfair enrichment

HMRC can refuse to make a reimbursement if it believes that the claim would result in unfair enrichment. This occurs where a trader has either charged VAT that shouldn’t have been charged to customers; passed the economic burden of wrongly-charged VAT onto customers; suffered no loss or damage as a result of having passed the mistaken charge onto customers; or is unwilling to reimburse customers with the amounts paid to him or her by HMRC.

Unfair enrichment can apply to all or part of a claim.

In certain circumstances, HMRC will only reimburse the amount remaining once all outstanding liabilities have been deducted. For instance, if an overpayment has been claimed on supplies where VAT was incorrectly charged, input tax deducted in relation to the same supplies may be offset against the amount claimed.

Reimbursements must be made under the reimbursement scheme, in which traders agree to pass back the payments to customers who bore the burden of the mistaken VAT charge.

The agreement states that traders must identify the customers to reimburse and make the payment in cash or by cheque within 90 days of receiving the credit. Where some or all of the credit has not been used to reimburse customers, the balance must be returned within 14 days of the 90 days expiring.

Traders must keep records of the names and addressed of the customers to reimburse; the total amount of money paid to each customer; the amount of interest paid to each customer, where applicable; and the date the money was refunded.

Unfair enrichment decisions can be appealed with traders able use the reimbursement scheme if the tribunal finds in their favour.