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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.

Trading income

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 Practice.

Current enquiries

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.

Identifying non-compliance

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.

A licence is need to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.

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Article Published/Sorted/Amended on Scopulus 2009-03-26 11:34:20 in Tax Articles

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