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HMRC internal manual

Business Income Manual

From
HM Revenue & Customs
Updated
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Specific receipts: refunds of sums paid as VAT: refund accounted for by someone other than the trader who made the overpayment: payment for services

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

If a company, other than the company that carried on the trade, receives the refund of a sum originally paid as VAT because it has provided a service and includes it in its accounts in accordance with GAAP with no corresponding payment made to the original trading company, then the refund is taxable in the hands of the company receiving it.

Examples of the type of service that may have been provided include acting as representative member for the VAT group, pursuing the refunds on behalf of the VAT group or providing a cross guarantee. See BIM40171 for guidance on VAT groups.

To determine the provision under which the company is taxable, you need to establish what services gave rise to the refund:

  • if the services are part of an existing management services trade being carried on by that company, then the sums are taxable as a receipt of that trade;
  • if the company is not carrying on a management services trade then the refund is taxable as miscellaneous income or as a post cessation receipt.

The relative size of the receipt in comparison to the service provided does not affect whether or not it is taxable if the facts show that it was received by that company by reason of it having provided a service. If the company asserts that there was some other reason for receiving the refund you need to establish what that was. Refer any case of doubt or difficulty to CTISA using the Technical Help on the left side bar.

If a company receives a refund of a sum originally paid as VAT as a result of having provided a service then the fact that it is taxable on sums that would not have been taxable in the hands of the original trader (such as expenditure originally disallowed as a trading expense for direct tax purposes either because it was a capital payment or it was a payment disallowed by statute) is irrelevant. This is because the refund is taxable as a reward for the provision of service and not as a refund as such.

Example:

W Ltd was a retail operation within the XYZ VAT group. W Ltd had over-paid VAT because it wrongly treated a food line as subject to VAT.

W Ltd, together with its trade, was sold by its parent, a member of the XYZ VAT group, in 2009.

The effect of the terms of the sale agreement was to give W Ltd a ‘clean-break’ from the XYZ VAT group.

Subsequent to the sale of W Ltd, the XYZ VAT group recognised that there was a potential claim for a refund of sums wrongly paid as VAT in respect of sales by W Ltd of this food line whilst a member of the XYZ VAT group.

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

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

Under VAT legislation the XYZ VAT group is entitled to the refund and under the terms of the sale agreement the XYZ VAT group is not obliged to pay the money on to W Ltd.

The directors of the companies in the XYZ VAT group agree that it is appropriate for Y Ltd to recognise the refund as a receipt of Y Ltd because of the work put in by Y Ltd in establishing the claim.

The directors of Y Ltd recognise the refund in the profit & loss account of Y Ltd for the year ended 31 December 2012, balanced by a debt due from HMRC, in accordance with GAAP.

The refund is taxable as part of the profits of the trade of provision of management services of Y Ltd for the year ended 31 December 2012.