Andrew Needham highlights the operation of VAT repayment inhibits and outlines how they can impact on a business.
A repayment inhibit is a ‘flag’ set on the HM Revenue and Customs (HMRC) VAT computer to suspend any payments due to a business that would normally be repaid automatically. It is an internal administrative procedure, usually initiated by a visiting officer. Typically, it will be used to prevent a repayment return being repaid, but it will apply to any credit balance on a business’s account for as long as the repayment inhibit remains in place.
There is no requirement for HMRC to notify a business of the fact that a repayment inhibit has been set up, nor the reasons for doing so, so the business will usually remain unaware of it until they notice they have not received their repayment. There is no appeal or any statutory right of review; nor is there a requirement on the officer to use best judgment; nor is there a time limit or requirement for periodic review; so this is an extremely powerful and draconian tool available to HMRC.
When are they used?
Repayment inhibits were used extensively by HMRC to combat missing trader intra-community (MTIC) frauds, by starving a business of its VAT refunds for an indefinite period so that it ended up in liquidation. As these frauds were costing the government billions of pounds, this was not an unreasonable use of HMRC’s powers, which was supported by the courts. However, there is a tendency to set repayment inhibits in far less serious circumstances, and it is very difficult to get them removed.
Use of a repayment inhibit can therefore be arbitrary and inappropriate in the circumstances, and bear no relation to the tax at risk. In situations of this kind, the use of a repayment inhibit can be seen as coercive rather than protective.
What remedies are available?
There is no direct right of appeal to the tax tribunal, and any complaints to HMRC are dealt with internally so the decision to remove a repayment inhibit is at the discretion of the reviewing officer, normally the line manager of the officer who set the repayment inhibit in the first place.
The same care and standards that are applied to the issue of an assessment should be applied to the use of repayment inhibits, but current procedures and safeguards fall short of this. Without published guidance a business would struggle, and probably fail, to persuade an officer not to use a repayment inhibit where an assessment should be used, or to keep the inhibit under review as circumstances change.
The only legal course open to a business in these circumstances is to ask for judicial review by the High Court. However, this is an expensive procedure and normally costs at least £20,000 to complete. HMRC is aware of this, and take advantage of the fact that most businesses are unable to afford to take the matter forward.
The professional bodies have concerns about the operation of the repayment inhibit and have raised a number of points with HMRC. However, HMRC has not been forthcoming in response to these points. It seem clear that, following the ECJ case Enel Maritsa Iztok 3 AD v Direktor ‘Obzhalvane i upravlenie na izpalnenieto’ NAP (Case C-107/10), in the event of the misuse of a repayment inhibit the taxpayer is entitled to the payment of interest on any outstanding amounts, so businesses that find themselves in this position should request interest from HMRC.
Practical Tip:
If you have a dispute with HMRC and they set a repayment inhibit, you should should ask for it to be reviewed and if HMRC are uncooperative you should ask for interest on any amounts due.
