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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Specific receipts: refunds of sums paid as VAT: VAT group examples

This is direct tax guidance; for indirect tax guidance, refer to VAT Guidance.

The deeming provision under VAT legislation in relation to VAT groups does not alter the direct tax analysis. The refund is likely to be recognised in the accounts of the entity carrying on the activity that led to the refund being made and will be taxable as a trading receipt or a post cessation receipt.

Example A

X Ltd, a retailer, is a member of the XYZ VAT group. X Ltd finds that it has over-paid VAT because it has wrongly treated one of its food lines as subject to VAT.

Y Ltd, the representative member for the XYZ VAT group, makes the appropriate claim. In doing so Y Ltd is acting on behalf of the XYZ VAT group including X Ltd.

In December 2012, HMRC agree the claim, and the refund is accounted for by Y Ltd, acting as representative member for the XYZ VAT group in January 2013.

The existence of the VAT group does not affect the treatment for accountancy and direct tax purposes. The directors of X Ltd recognise the refund in the profit & loss account of X Ltd for the year ended 31 December 2012, balanced by a debt due from Y Ltd, in accordance with GAAP.

The refund is taxable as part of the profits of X Ltd for the year ended 31 December 2012.

Example B

Z Ltd was another retail operation within the XYZ VAT group. Z Ltd had also over-paid VAT because it also wrongly treated the same food line as subject to VAT.

Z Ltd, together with its trade, was sold by its parent company, a member of the XYZ VAT group, in 2010.

Under the terms of the sale, it was agreed that the right to any future refund of sums wrongly paid as VAT in respect of this food line would remain with Z Ltd.

Y Ltd, the representative member for the XYZ VAT group, makes the appropriate claim on behalf of the VAT Group.

In December 2011, HMRC agree the claim, and the refund is received by Y Ltd, acting as representative member for the XYZ VAT Group in January 2011. Under the terms of the sale agreement, Y Ltd pays the money on to Z Ltd.

The directors of Z Ltd recognise the refund in the profit & loss account of Z Ltd for the year ended 31 December 2011, balanced by a debt due from Y Ltd, in accordance with GAAP.

The refund is taxable as part of the profits of Z Ltd for the year ended 31 December 2011.

Example C

R Ltd, S Ltd and T Ltd are car dealers and members of the RSTU VAT Group. Following the case Italian Republic C-45/95, they consider that they have all over-paid VAT in respect of demonstrator cars.

U Ltd, the representative member for the RSTU VAT group, makes the appropriate claim. In doing so U Ltd is acting on behalf of the RSTU VAT group. U Ltd engages accountants to pursue the claim on their behalf.

In December 2007, the refund is received by U Ltd, acting as representative member for the RSTU VAT group.

The directors of R Ltd, S Ltd and T Ltd agree that U Ltd can have 25% of the refund to cover costs.

R Ltd, S Ltd and T Ltd are taxable on the refunds, but can claim the payment to U Ltd as an expense.

U Ltd has received the 25% for the service of organising and pursuing the claim. The 25% is taxable as a receipt of its trade of the provision of management services, but U Ltd can claim the fees due to the accountants as a deduction.

Example D

P Ltd was a car dealer acquired by R Ltd in 1990, at which point it became part of the RSTU VAT Group. P Ltd ceased trading in 1999 and was dissolved in 2000.

Following the Italian Republic case, R Ltd considered that VAT had been over-paid in respect of demonstrator cars in the dealership operated by P Ltd.

U Ltd, the representative member for the RSTU VAT group, makes the appropriate claim in January 2007. In doing so U Ltd is acting on behalf of the RSTU VAT group and can only claim for the period when P Ltd was a member of the RSTU VAT group.

For periods prior to 1990, P Ltd had its own VAT number. In order to claim for these periods, P Ltd is restored to the register at Companies House.

In December 2007, the refund in respect of the period whilst P Ltd was a member of the RSTU VAT group is received by U Ltd, acting as representative member for the RSTU VAT Group.

In June 2008, the refund in respect of the period before P Ltd was a member of the RSTU VAT group is received by P Ltd.

P Ltd is taxable on both refunds under the post cessation receipts legislation.

See BIM40188 for the time limit which now applies to limit the periods for which a refund claim can be made. The time limit applies to claims made on or after 1 April 2009.

Transfers

The refunds do not become non-taxable through a transfer or transfers to other members of the VAT group.