VAT refunds in the UK

VAT refund or VAT repayment: two routes

A VAT refund in the UK can mean two different things. A repayment is the credit on a VAT return. A refund of VAT paid by mistake uses the error-correction route. GOV.UK distinguishes between them in its VAT repayments guidance.

Start with why HMRC owes the money. Is the credit on a correct return, or does an earlier error need correcting?

Getting a repayment through your VAT return

If you charged customers less VAT than you paid on purchases, HMRC will usually repay the difference. Box 3 shows total VAT charged and Box 4 shows total VAT paid. When Box 3 is lower than Box 4, the figure in Box 5 is repayable.

Worked example: buying equipment

For illustration, a business makes £20,000 of sales at 20% in a quarter, charging £4,000 VAT. It buys equipment for £50,000 plus £10,000 VAT.

• Box 3: £4,000
• Box 4: £10,000
• Box 5: £6,000 repayable

HMRC may check the return first. This example illustrates the calculation; it does not establish what your business can reclaim. For the filing steps, see how to submit a VAT return.

How and when HMRC pays

HMRC processes most repayments automatically after receiving the return. It will contact you for more information if it needs to check accuracy. Repayment is usually within 30 days of receiving the return, but checks can take longer.

Check progress in your business tax account. Contact HMRC if the account has not been updated, or you have not been contacted, within 30 days.

HMRC pays into your bank account if it holds repayment bank details. Otherwise, it sends a cheque, also called a payable order. You can change repayment details or ask for the credit to pay another tax.

An overseas bank account is possible only if the company has no UK bank account it can get and no UK address. The account must be in the company's name and accept pounds sterling. Follow the bank-details instructions in the repayments guidance.

For a lost or out-of-date cheque, write to HMRC Payments with your name, VAT number, address and contact number. Return any out-of-date cheques. Use the address in the same GOV.UK guidance.

For other obligations, see VAT return deadlines and how to pay VAT.

Interest on a late VAT repayment

For accounting periods starting on or after 1 January 2023, repayment interest replaces repayment supplement. If HMRC is late, you may be entitled to interest at the Bank of England base rate minus 1%, with a minimum rate of 0.5%.

The calculation is amount × annual rate × days ÷ 365. For illustration only, £6,000 for 10 days at an assumed 2% gives £3.29. The 2% rate is assumed, because the actual rate follows the Bank of England base rate.

No repayment interest is paid where you paid in error, such as paying £1,000 instead of £100. If returns are overdue, interest on a repayment return starts only when HMRC receives the last overdue return.

If HMRC asks for VAT security and you do not pay it, no interest runs from the notice date until payment. Repayment interest ends when HMRC repays the money or sets it against other debts. Check the repayment interest rules for the applicable conditions.

Claiming VAT paid by mistake

VAT paid by mistake, or input VAT left unclaimed, needs an error correction. VAT Notice 700/45 sets out two methods:

• Method 1: adjust your VAT account and next return for net errors up to £10,000, or £10,000 to £50,000 within the limit in paragraph 4.3 of the notice.
• Method 2: report larger errors separately to HMRC online or in writing, including your VAT registration number. You can also choose this method for smaller errors.

The correction time limit is four years. For over-declared output tax and over-claimed input tax, it runs from the end of the accounting period in which the error occurred. For under-claimed input tax, it runs from the return due date. There are exceptions: check the notice before relying on a time limit.

HMRC will not pay a claim that would unjustly enrich you; see paragraph 5.1. If a supplier wrongly charged you VAT, seek the refund from that supplier. Paragraph 5.2 treats this as a commercial matter.

An authorised accountant can deal with HMRC for you.

Other VAT you may be able to claim back

Purchases before registration

You may reclaim VAT on goods bought within four years before registration if you still have them, or used them to make goods you still have. For services, the limit is six months. The purchases must be for the business now registered. See GOV.UK's reclaiming VAT guidance.

Unpaid customer debts

Bad debt relief has conditions. You must have accounted for and paid the VAT, written off the debt in your VAT accounts, and moved it to a separate bad debt account.

The debt must remain unpaid for six months after the later of the payment due date and date of supply. Claim through Box 4 within four years and six months of the later of those dates. See VAT Notice 700/18.

Under the Cash Accounting Scheme, VAT is paid only on amounts received, so bad debt relief is unnecessary.

What you cannot reclaim, and the records you need

Not every purchase supports a VAT claim. GOV.UK's charge, reclaim and record VAT guidance excludes:

• Anything only for personal use
• Goods and services used to make VAT-exempt supplies
• Entertaining or hospitality for people you do business with
• Goods bought under a second-hand margin scheme
• Business assets transferred to you as a going concern

You need valid VAT invoices and records to support a claim. Where there is private use, claim only the business proportion. Flat Rate Scheme users cannot reclaim purchase VAT except on certain capital assets over £2,000.

Keep the evidence alongside your essential business records. Organisations that are not VAT registered use a different route where eligible: see the VAT126 link in GOV.UK's guidance.

Regular repayments can be normal

A repayment return is not a sign of an error. Some businesses have regular repayments. The filing steps are covered in our VAT return guide.

Overseas visitors and tax-free shopping

The VAT Retail Export Scheme was withdrawn from Great Britain from 31 December 2020, as confirmed in Revenue and Customs Brief 21 (2020). GOV.UK's Northern Ireland guidance says goods bought in Great Britain can only be tax-free if delivered straight to an address outside the UK, while Northern Ireland retains a Retail Export Scheme for visitors from outside Northern Ireland and the EU.

Check the rules before claiming

Figures and rules can change, so check the linked GOV.UK guidance before making a claim. RR Accountants is not HMRC. This guide explains business repayment and refund routes; it does not decide your entitlement.