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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: what happens when refund is repaid to HMRC

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

Litigation over the scope and coverage of VAT, and the impact of European law, is ongoing. This can lead to the position where a business will receive a refund of a sum paid as VAT, only to have to repay some or all of this to HMRC following subsequent litigation.

In this situation, the direct tax position follows the accountancy treatment.

Example

X Ltd is a motor dealer. Following the case Italian Republic C-45/95, in November 2007 X Ltd receives a refund of a sum paid as output VAT in respect of the sale of demonstrator cars. X Ltd has run the garage since 1982.

The refund is recognised in the accounts for the year ended 31 December 2007 in accordance with GAAP and is charged to corporation tax as part of the profits of that year.

In November 2010, X Ltd is advised that following a review of the implications of a further decision of the ECJ, Nordania Finans C-98/07, it needs to repay part of the refund as a partial exemption adjustment. The repayment is recognised in the accounts for the year ended 31 December 2010 in accordance with GAAP and is an allowable deduction in arriving at the corporation tax profits of that period.