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Firms face lengthy battles to claw back interest on VAT refunds.

Firms are set for a possible tax-back bonanza after an overpayments row about interest rates.

But it could yet take years to resolve, says Denis Holly, Midlands VAT director for accountants and business advisers Horwath Clark Whitehill.

Currently, when a business has overpaid VAT, HM Revenue & Customs will only pay simple interest for the period that it has been incorrectly holding it.

Mr Holly said: "This has been a festering sore as simple interest does not give an adequate measure of the commercial cost to a business of not having the money involved available to use.

"Compound interest is a better measure of the commercial restitution HMRC should make." And gradually, it seems, this is beginning to happen.

A direct tax case involving Sempra Metals held that compound interest was a better measure of the cost to the taxpayer than simple interest in such circumstances. The principle has now been accepted for VAT in the High Court.

Mr Holly said: "In view of the cost to the Government especially with major claims already in the system going back to 1973, where payment of compound interest will dwarf the underlying VAT overpaid, they are likely to appeal.

"I have a client where the underlying VAT is pounds 160,000, simple interest will add another pounds 200,000, and compound interest pounds 425,000."
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Publication:The Birmingham Post (England)
Date:Jul 1, 2009
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