VAT Repayment Supplement abolished. But what has replaced it?

There’s something incredibly satisfying about completing a VAT return and realising that the taxman actually owes you money. For most businesses, it happens when they make a major investment in equipment or other high-ticket items. This can mean you pay out more VAT than you collect during the relevant quarter. HMRC then has to pay you the VAT it owes within a certain timeframe. If it is late in paying, it used to add a VAT Repayment Supplement.

However, the VAT Repayment Supplement has now been scrapped. So what has replaced it?

In this post, we’ll update you about the changes. But first, let’s take a quick look at the old system.

The old VAT Repayment Supplement scheme

Before, if you submitted a VAT return and HMRC owed you money as a result, it should have processed the repayment within 30 calendar days. The rules are slightly different if HMRC decided to make enquiries into the claim. In this case, repayment should have been within 30 days, plus the number of days spent making ‘reasonable enquiries’.

If HMRC didn’t repay the VAT within this timeframe, then the VAT Repayment Supplement kicked in. This means that you got an extra 5% of the repayment amount, or £50 (if that is the greater sum).

Let’s take an example. Under the old rules, you submitted a VAT return which told HMRC it owed you a £50,000 repayment. HMRC makes no enquiries, but it also doesn’t make the repayment until 40 days after you submitted the return. As a result, your repayment would have been £52,500 (£50,000 plus a 5% supplement of £2,500).

How the new VAT supplement scheme works

The replacement for the VAT Repayment Supplement Scheme came into effect on 1st April 2022.

There’s one positive aspect to it. If the taxman delays your repayment to undertake an enquiry, HMRC will pay interest for the number of days it takes.

Sadly, the good news ends there. From the same date, the 5% supplement was replaced by interest payments instead. The rate currently stands at 4.25% (March 2024).

Going back to the example of the £50,000 repayment, the current rules mean that a 10-day delay would give you £2125 in interest, rather than £2,500 and this will drop further as interest rates fall.

What happens next?

As things stand, our worry is that HMRC will take longer over any future VAT enquiries. If delay is only costing them less interest on your repayment instead of a substantial 5% of the total, there’s bound to be a temptation for the taxman to drag his feet.

For this reason alone, it’s crucial that your VAT returns are as well prepared and accurate as possible. The better your accounts, the fewer holes the taxman can pick in them!

At THP, we can help you make sure your VAT returns are in tip-top condition, as well as advise you on the VAT Repayment Supplement replacement scheme. If you’d like any help with either, please drop us a line today.