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HMRC have legislated to ensure that from 1 April VAT repayments arising from any 'new mistake of law decision' will now be subject to a four-year cap, in an increase from the previous three years.
The move follows a number of recent European Court of Justice judgments that have resulted in substantial payments of overpaid VAT and interest being made to traders for periods covering many years.
Revenue & Customs Brief 14/09 summarises the department's fundamental position for direct tax purposes, as it applies in relation to these repayments.
Some believe 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 do not agree with this view: first because there is no legal authority in support of this assertion, and second because what is being repaid is not VAT.
What the Revenue is effectively saying is that a business’s financial accounts prepared at the time are commonly prepared on a VAT exclusive basis and therefore the original turnover and Case 1 profits would have been 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 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.
With regard to statutory interest received in respect of the repayments, this is interest for tax purposes.
While the interest does not arise from any loan, FA 1995, s 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.
HMRC's view is 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.
The Revenue's view this as a priority compliance risk and will continue to challenge such cases.
