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HMRC will not pay compound interest on overpaid VAT

HMRC will not pay compound interest on overpaid VAT

Limited company contractors who have overpaid VAT are unlikely to be allowed to claim compound interest from HMRC.

The European Court of Justice’s advocate general has decided that despite HMRC’s breach of European law, the VAT that was overpaid by UK taxpayers would only have simple interest applied.

Some of the overpayments date back to 1973 and taxpayers have been arguing that the overpaid amounts should attract compound interest. However, Trstenjak, the advocate general, said it was unlikely that taxpayers would be allowed to claim compound interest and his opinion is general followed by European court judges.

Stuart Walsh, a tax partner at McGrigors, said this was a significant blow to the many UK businesses that are currently contesting VAT claims. There is a vast amount of money at stake and given the uncertain state of the public purse, this new guidance could provide a significant boost to the Treasury.

By allowing the Revenue to only pay simple interest it gives it the incentive to keep hold of taxpayers’ money in order to boost its own cashflow position. That perverse incentive would have been removed if HMRC had to pay compound interest on overpaid VAT.

HMRC has also recently been accused of deliberately withholding notices informing small businesses that their income tax returns were late. The tax tribunal said the Revenue was using small businesses as cash generators by not alerting them straight away when tax returns were late. HMRC disagreed with the ruling and said it would not refund money to those who had been hit by steep penalties.

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Image: Drunken debt to pay back… #nawesome by defaulterror

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