Commercial restitution

HMRC’s long-standing policy was to not charge interest on underpayments notified outside a VAT return if there was no loss of tax to the public funds. For example, where VAT not charged by one business would have been fully claimed as input tax by the buyer, the overall position is VAT-neutral. This outcome is commonly known as commercial restitution and was a practical policy which recognised VAT as a unique tax.

Most businesses must disclose errors to HMRC, rather than include them on their next VAT return, if the net tax owed or owing exceeds £10,000. For very large businesses, net errors up to £50,000 can be adjusted on the return in some cases.

What has changed?

If the VAT owed on a return is paid late, or past underpayments are notified to HMRC as an error correction, then HMRC says it must charge late payment interest in all cases because it no longer has discretion in the legislation to not charge interest. In other words, commercial restitution is no longer relevant. The revised policy applies to VAT periods starting on 1 January 2023 and later.

What can you do? 

If you have underpaid output tax on previous returns, don’t forget that the VAT underpayment is 1/6 of the sales value and not 20%, i.e. the amount you have invoiced and received from your customer is treated as being inclusive of 20% VAT. This adjustment might reduce your net underpayment to less than £10,000 and you can therefore include it on your next return. Tax declared on a return will not be subject to interest as long as you submit and pay it on time.

For sales that you make which are subject to 5% VAT, your underpayments will equal the value of past sales multiplied by 1/21.