H.M. TREASURY Notes on Clauses

CLAUSE 16: VALUE ADDED TAX (REPAYMENT SUPPLEMENT)

INTRODUCTION

1. This clause provides for a revised starting date for the 30 day period allowed to authorise repayment of VAT credits or certain refunds after which Customs will pay a 5% supplement. The change applies to returns or claims received by Customs on or after 9 March 1999.

DETAILS OF THE CLAUSE

2. Subsection (1) introduces the clause, which effects changes to section 79 of the Value Added Tax Act 1994. Section 79 provides for the payment of a 5% supplement where Customs delay certain payments or refunds by more than 30 days.

3. Subsection (2) amends subsection (2)(b) of section 79 which provides for one of the three conditions which must be met before a supplement will be paid; namely that payment must be authorised within 30 days of receipt by Customs of the return or claim. The effect of the amendment is to amend the current way for determining when the 30 day period (the relevant period) commences.

4. Subsection (3) inserts a new subsection (2A) in section 79 which defines the 'relevant period' in which a repayment must be authorised if Customs are to avoid a liability to pay a repayment supplement. The 'relevant period' is defined as a 30 day period beginning with the later of the day after the end of a prescribed accounting period or the day on which the return or claim is received by Customs. The effect of the change is to ensure that the 30 day period cannot begin before (at the earliest) the end of the prescribed accounting period covered by the return or refund claim.

5. Subsection (4) makes consequential amendments to subsections (3) and (7) of section 79. The amendments are necessary because the clause moves the way that the commencement of the 30 day period is determined from subsection (2)(b) to the new subsection (2A). Subsection (4) also provides that regulations made under subsection (3) of section 79 will be interpreted in line with the amendment made to subsection (2) of section 79 and the insertion into that section of subsection (2A).

6. Subsection (5) provides that the amendments will be effective in respect of all returns and claims received by Customs on or after 9 March 1999.

BACKGROUND

7 Repayment supplement is a sanction against Customs for undue delay in authorising certain payments of VAT credit or refunds. Subject to conditions, a supplement will be paid if Customs delay payment by more than 30 days. In current law, this period of 30 days starts on the day that the return is received.

8. Customs will not authorise repayment of the credit or refund before a legal entitlement to it arises at the end of the prescribed accounting period. However, there can be cases where a repayment return is received well before the end of the prescribed accounting period to which it relates. In these cases, the 30 day period could expire, and Customs would be liable to pay a supplement, before they are legally obliged to pay the actual credit or refund. This creates a loophole whereby Customs may be liable to pay a supplement in circumstances where this was never envisaged or justified.

9. The measure closes the loophole and removes the incentive for businesses to devise schemes which facilitate the submission of high value repayment returns well before the end of a prescribed accounting period simply to gain an additional 5% of the amount claimed.

10. The measure is effective from 9 March 1999 and will prevent would-be avoiders from exploiting the loophole between Budget day and Royal Assent.