Clarke backs down on VAT repayment ruling

Months of unrelenting pressure from accountants and industry finally forced the Chancellor to introduce equal claim periods for Customs & Excise and taxpayers under the three-year rule on VAT repayments.

Kenneth Clarke’s decision took many experts by surprise. Despite a strong campaign against the diktat, which was introduced without consultation on 18 July, most opponents of the rule believed Clarke would stick to his policy of allowing Customs six years to pursue underpaid VAT claims while businesses had just three to seek theirs.

But Clarke said there was a need to strike a balance. ‘Government must not only be fair, it must be seen to be fair,’ he told the Commons.

Accountants welcomed Clarke’s move, but stressed more was needed. Clarke insisted the rule will be applied, subject to parliamentary approval, from 18 July.

KPMG’s head of indirect tax George Michie said: ‘The symmetry will take the heat out of the situation. But the rule should be applied from Budget date, not 18 July.’

Ernst & Young’s national tax partner, Peter Jenkins, added: ‘The Chancellor has listened to representations from the Big Six and industry and he is looking forward to discussing the proposals further. This removes a major injustice and uncertainty. Everyone now knows that it is three years for all.’

Deloitte & Touche VAT consultant Peter Sloman said: ‘It’s a move in the right direction, but a transitional period of a few months is required in view of the number of claimants who are relying on overpaid refunds.’

The Budget statement also clarified areas covered by the new rule. Overpaid VAT will not be returned if it unjustly enriches a business, while DIY housebuilders and local authorities’ non-business activities are not covered by the limit.

Price Waterhouse senior tax manager Teresa Ahern said: ‘The Chancellor has bowed to industry pressure, but we would now like to see better resolution of those claimants who already have claims in. It would be unduly punitive of Customs to pay the money owed and then claw it back.’