Unexpected repayment return: do you need to do anything?

One-off repayment returns

Your first challenge is to establish the reason(s) it has happened. You should carry out this review before submitting the return to HMRC in case there are errors. A repayment return is caused by input tax being higher than output tax and the most common reasons are as follows:

• your business had unusually high zero-rated sales in the period - see the example below
• a loss-making outcome, e.g. a sudden decrease in your sales means that your spending has exceeded your income
• buying assets or equipment, e.g. a farmer purchasing a combine harvester and having a large input tax claim.

You should also check the output tax/outputs and input tax/inputs ratios on the return. For example, if all of your sales are standard-rated, the Box 6 outputs figure multiplied by 20% will equal the Box 1 output tax figure.

Adjust your figures

Once you have established the reason for the repayment - let’s call it the “relevant factor” - you should check if the return would be a net payment to HMRC without it.

Example. Builder John usually pays £5,000 on his quarterly returns. For the period to 30 September 2024, his return has produced a repayment of £4,000. However, he had exceptionally high zero-rated sales of £50,000 this quarter, compared to £5,000 in a typical period. The extra £45,000 of zero-rated sales explains the repayment - if these sales had been standard- rated, the extra output tax of £9,000 means that John would have paid £5,000 to HMRC, i.e. the relevant factor for the repayment is the zero-rated turnover.

Should you contact HMRC?

The answer is “no”. Once you are satisfied that your figures are correct, you should submit the return as normal and let HMRC’s compliance team contact you if it wants to apply further checks. There is no way of knowing if your return will be selected for a review but the higher the repayment, the more likely it is to be checked. Contacting HMRC could make the situation worse because you would then be involving two officers and this could create confusion.

How long will repayment take?

HMRC quotes a turnaround time of 30 days to make the repayment, but it has encountered many problems meeting deadlines, and its service level problems have been well publicised. Your priority should be to plan for an HMRC review, having a bundle of back-up documentation - as well as sales and purchase invoices - to explain why your return is a repayment. The officer can then review the documents quickly and approve your repayment. Ensure that your business cash flow is not dependent on getting the repayment quickly.

What about interest?

HMRC used to pay a repayment supplement equal to 5% of the net repayment if it delayed a repayment by more than 30 days but you are only entitled to receive repayment interest, which takes effect from the day after the due submission for the return in question. The interest rate is set at the Bank of England base rate minus 1%, subject to a minimum rate of 0.5%. If you submit your return late, you will only earn interest from the submission date. It is important to submit it as soon as possible after the end of the period.