It happens sometimes: your business is owed a VAT repayment, but delays in receiving the money from HMRC occur for some reason. How does this happen, and what should you do? This guide will cover when a refund for VAT is delayed and how to rectify this.
How delays happen and their impact on a business
A business that is registered for VAT needs to submit its VAT returns to HMRC every three months. The business needs to record (for the three-month period) on its VAT return its total sales and purchases, the amount of VAT it owes, the amount of VAT it can reclaim, and what its VAT refund from HMRC is. Even when the business has no VAT to pay or reclaim, the return must be completed and submitted to HMRC.
Usually if a business charges less VAT to its customers (output VAT) than it has paid on its purchases (input VAT), HMRC repays the difference between the output and input VAT back to the business. “It is not unusual for a business’s first VAT return to be a repayment return,” observes John Rainsford, VAT director at Smith & Williamson. Occasionally, he says, a VAT repayment can be due to other reasons: for example, if a business bought a commercial building from a seller that has opted to charge VAT on it, the business will want to claim the VAT on its property purchase back as soon as possible.
Recovering property-related VAT can particularly be a problem, explains RSM VAT manager Ian Brown, for property developers that have a “golden brick” arrangement in place and are selling their constructions onto a firm that is VAT-exempt, i.e. a firm that cannot charge output VAT nor recover VAT on its purchases. In this case, the land purchase needs to be converted from a transaction where the seller has opted to charge VAT, into a VAT-free transaction when selling onto the VAT-exempt firm.
“The construction company in a ‘golden brick’ arrangement will need to fund all construction costs, including any professional fees associated with the construction, and pay VAT on those costs,” says Brown. “Then the company has to spend time building to a certain level (usually when construction work has reached above foundation level – the so-called ‘golden brick’ level) before it can recover the VAT paid on the costs. Any further delay in the repayment of VAT on these costs will obviously affect the construction company’s finances.” Some construction firms have therefore been reluctant to sell onto VAT-exempt businesses for this reason: “the charitable sector has been hit” by this reluctance, Brown says, as some charities are exempt from VAT.
But construction and property transactions are not the only way a VAT repayment delay can occur. While Brown cited the example of a client that had a significant VAT repayment due, but “because a small amount of the entire amount on the VAT return – just £150 – was being disputed, HMRC withheld the whole repayment until the dispute was resolved”, Rainsford noted there were other scenarios in which a VAT repayment could be delayed.
For example, a non-EU business, such as a US-based company not registered in the UK for VAT that incurs VAT on expenditure in the UK, will need to make a claim according to the procedure in the European Union’s 13th VAT Directive. “The VAT repayment on these claims can’t be sped up,” Rainsford said, “so there is not much an overseas business can do about any EU VAT refund delays. However, the UK is one of the best EU member states for repayments of overseas VAT claims.”
The most obvious impact on a business of a VAT refund delay is on its cashflow – in a worst-case scenario, cashflow problems can occur when an expected amount of money is not paid to the business when it should be due. But, as Brown points out, while cashflow is the main problem for a business in this situation, it is not the only one: “There is also the stress of an ongoing HMRC investigation, not to mention that seeking advice incurs professional fee costs,” he adds. “In the worst cases, there can be the threat of insolvency – even where there is a Time To Pay arrangement in place.”
How to minimise a VAT repayment delay
Once a business’s VAT return is submitted, HMRC has 30 days to make any enquiries before they process the return and send your business the repayment. “HMRC are likely to query the return if it’s a business’s first VAT return that results in a repayment due, or if it’s a particularly high VAT repayment due,” Rainsford says. “Ensure that a VAT repayment return is submitted as soon as possible – don’t wait for the deadline to submit your return, because the 30-day clock for HMRC to enquire into your VAT return starts from the day you submit it. For example, a VAT return for the three months to 31 December can be submitted by 7 February at the latest, but its best to submit it at the beginning of January.”
As well as submitting your VAT repayment return as early as possible, Rainsford advises that a business should “ensure that the submitted return is accurate, and that evidence is there to support the repayment claim – if there is an error in the return, then that stops the 30-day clock, because HMRC will enquire into your return and will not process the return (and therefore your VAT repayment) until it is satisfied.” Penalties can be levied for erroneous VAT returns – careless errors will be penalised at 30% of the “potential lost revenue” to HMRC arising from the error, although an error deemed to be deliberate will be penalised at 70% while an error deemed to be “deliberate and concealed” will be charged at a 100% penalty. It is therefore best to ensure that valid and dated invoices can back up all amounts recorded on the VAT return.
The third step is to ensure that HMRC has valid bank details to ensure a timely repayment into your business’s bank account. “HMRC only accepts UK bank accounts in order to make an electronic transfer of funds – overseas bank accounts are not accepted,” Rainsford says. “If there are no UK bank account details available, HMRC issues a payable order which can get lost in the post. In the case of an enquiry into your repayment return – such as if it was your first VAT return or an unusually high repayment – even if you have provided the relevant invoices and evidence to satisfy HMRC’s enquiries, it will still take a further ten days for HMRC to credit your business’s bank account with the repayment. The business will need to keep an eye on its bank account for the funds, as no notice will be given as to when the repayment monies will arrive.”
What to do if HMRC queries your VAT repayment return
Most VAT repayment delays are due to HMRC opening an enquiry into the return, but even if this happens, there are still steps you can take to ensure you recover your money as quickly as possible.
“If the VAT repayment is high, or higher than usual, then 99% of the time it’ll be queried by HMRC,” says Rainsford. “One thing you can do is, at the time you submit your VAT return, send the evidence for the amounts on the VAT return to HMRC’s written enquiries department by post, with copies of the highest VAT invoices and the reason for the claim, to pre-empt any enquiries. That way, HMRC will have the evidence for your VAT repayment claim on record, and the assigned officer looking at your case can see under your VAT number that evidence for your repayment has been received and put on file – that is often sufficient to clear it and close the enquiry.”
HMRC should also be kept informed of any likely future repayment amounts, Rainsford adds: “If you’ve got invoices from suppliers, it seems sensible to ensure they are dated correctly and dated during the period of the VAT return you will claiming the repayment for.”
Brown agrees that working with HMRC in the event of an enquiry into the VAT return, and providing the evidence they need in a timely fashion, is vital. “Many clients panic or hide or want to stick their heads in the sand, but the approach is to engage with HMRC,” Brown says. “Having a body of evidence to show that the repayment was correctly incurred, such as valid and correctly dated VAT invoices related to expenditure, should be what is reasonably required to authorise the repayment. HMRC has to come up with a reason for withholding it.
However, sometimes it can depend on the HMRC officer involved, Brown admits. “We once wrote to an officer involved in our client’s case citing the relevant case law for the officer to look at. The key point is this: if you think you’ve completed your VAT repayment return correctly and provided the evidence, you don’t have to accept HMRC’s answer that your repayment is not due – you can point to HMRC’s own guidance and tax case rulings.”