Direct tax issues re VAT repayments
HMRC have set out their view as to the direct tax consequences of one-off VAT repayments. This follows a number of high profile ECJ cases (such as Fleming) which have provided taxpayers with significant VAT repayments and interest.
HMRC’s view is that these payments are part of the taxable income of a business and are subject to direct tax. HMRC proffer two reasons for this assertion, firstly that there is no legal authority to suggest that the payments are outside the scope of Corporation Tax and secondly that what is being repaid is not technically VAT.
HMRC assert that the repayments are in respect of sales income which was wrongly declared as VAT and now effectively comprise a profits windfall. They have a similar position in relation to interest repayments.
Whilst acknowledging that some businesses will disagree with their view, HMRC will continue to challenge businesses who contend that the repayment and/or interest is outside the scope of direct tax in accordance with their litigation and settlement strategy.