HM Revenue and Customs Brief 14/09
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VAT Repayment Claims and Statutory Interest - Treatment for
the purposes of Direct Tax
A number of European Court of Justice Judgments in recent
years have resulted in substantial repayments by way of overpaid VAT
and Statutory Interest being made to traders for periods covering many
years. HM Revenue & Customs (HMRC) has recently legislated to
ensure that from 1 April 2009 VAT repayments arising from any 'new
mistake of law decision' by the courts will be subject to a four year
cap (increased from three years with effect from 1 April 2009).
However, traders have up until 31 March 2009 to submit claims for
periods as far back as the introduction of VAT in 1973 and it is
anticipated that significant repayments will be made. These claims for
repayment are often referred to as 'Fleming' claims.
Section 80 VATA 1994 (as amended by section 3 of the Finance
(No 2) Act 2005) is the statutory provision which enables the majority
of claims to be made for repayment of output tax overdeclared because
of a mistake either of law or fact.
This brief is not intended to provide a definitive technical
analysis of the treatment for direct tax purposes of amounts repaid.
The circumstances and considerations vary dependent on the particular
circumstances of each case. It does however summarise the department's
fundamental position and approach for direct tax purposes, as it
applies in relation to these repayments.
It has been suggested by some that as a matter of legal
principle, receipts of refunds of VAT credited to the profit and loss
account are outside the scope of Corporation Tax. HMRC does not agree
with this view, firstly because there is no legal authority in support
of this assertion and secondly because what is being repaid is not VAT.
The financial accounts prepared at the time are commonly
prepared on a VAT exclusive basis and therefore the original turnover
and Case 1 profits were reduced by the excessive amount incorrectly
paid over as VAT. The repayment of amounts in respect of VAT,
originally wrongly declared, are simply returns to the taxpayer of
amounts which would have formed part of the taxpayer's trading receipts.
The reality is that a trader has simply calculated a higher
sale price to the customer, because of a mistaken view of the law at
the date of the transaction. Having subsequently become aware of the
incorrect view of the law at the time of the transaction and that the
additional amount received from the customer is not VAT, then clearly
the amount is a trade receipt in exactly the same way as if it had
resulted from any other mistake eg giving the wrong change.
The repayments represent sums that arose from the sale of
goods or services in the ordinary course of its trading activities. The
fact that amounts were paid to (the former) Customs and Excise in the
belief that they were output tax properly due on those supplies, does
not alter their trading character for Case 1 purposes.
Receipt of interest
Statutory Interest received in respect of the repayments is
interest for tax purposes. While the interest does not arise from any
loan relationship as defined by section 81 Finance Act 1996 because it
does not arise from the lending of money, section 100 operates to bring
interest on money debts within the scope of the loan relationship
rules. The period to which a payment relates is the period in which it
would properly be recognised under Generally Accepted Accountancy
HMRC's view is that that the repayments and interest are
demonstrably part of the taxable income of the business and therefore
chargeable to direct tax as trading income and interest respectively.
However, there are some businesses who are contending that the
repayment and/or the interest are not taxable. HMRC view this as a
priority compliance risk and will continue to challenge such cases in
accordance with our Litigation and Settlement Strategy.
A co-ordinated project is now ongoing to ensure that all
current and future non-compliance risk is identified and addressed in a
consistent manner, with particular reference to 'Fleming' claims. Where
potential non-compliance is identified, an intervention will be
undertaken to establish the necessary facts.
About the Author
© Crown Copyright 2009.
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Article Published/Sorted/Amended on Scopulus 2009-03-26 11:34:20 in Tax Articles