VAT Refund Held By HMRC: Why It Happens And What To Do

A VAT refund held by HMRC is typically the result of a repayment verification check, a routine control applied before HMRC releases money rather than a formal accusation of wrongdoing. HMRC checks repayment returns to confirm the input tax being reclaimed is genuine and properly evidenced before paying out.

This is a narrower issue than a full compliance check on your VAT affairs generally, and it is usually resolved by supplying the specific evidence requested rather than by a wide-ranging review of every return.

Common triggers include a first VAT repayment claim after registration, a repayment that is unusually large compared with previous returns, a claim linked to exports or zero-rated sales, or a mismatch with information HMRC already holds about the business.

New VAT registrations claiming repayment before significant sales have built up are frequently checked, partly because this pattern is sometimes associated with fraudulent registrations elsewhere. A genuine business with clear evidence should not find this an unreasonable step, even though it is frustrating.

HMRC can request the underlying invoices, contracts and evidence of payment that support the input tax claimed, using its information powers under Schedule 36 Finance Act 2008. For export claims, evidence that goods left the UK, such as shipping documents, may also be required.

Bank statements are often requested to confirm that payments shown on invoices were actually made and that the business has genuine trading activity. If a request appears to go beyond what is reasonably needed to verify the claim, you can ask HMRC to explain the relevance, and in the case of a formal information notice you may have a right to appeal specific requirements.

Refusing to provide reasonable evidence will not speed up payment; it typically causes HMRC to withhold the repayment and, in registration verification cases, can lead to deregistration risk if the underlying trading cannot be evidenced at all.

There is no statutory deadline for HMRC to complete verification, though HMRC aims to deal with repayment claims without unreasonable delay. A straightforward claim with clear invoices can be released within a matter of weeks. A claim linked to a new registration, exports or unusual transactions can take considerably longer, especially if the first response raises further questions.

Verification ends either with the repayment being paid, sometimes with interest if the delay was on HMRC's side and the claim was correct, or with HMRC amending or rejecting some or all of the claim if the evidence does not support it.

If HMRC concludes that some input tax was not properly claimable, it can reduce the repayment or raise an assessment reversing tax already refunded. Interest may apply, and a penalty is possible if the claim resulted from careless or deliberate error.

As with other VAT errors, the penalty range depends on behaviour: an honest mistake in a repayment claim, corrected once queried, sits at the lower end; a claim built on invoices that do not reflect real transactions sits much higher and can involve civil evasion or fraud consideration. Full cooperation and an early, accurate explanation help keep any penalty at the lower end of the applicable range.

The most damaging mistake is not responding, or responding only partially, to HMRC's evidence request, which simply restarts the clock. Amending the VAT return mid-verification, rather than waiting for the check to conclude, can also confuse the review and add delay.

Businesses sometimes assume that phoning HMRC repeatedly will speed things up. A single, well-evidenced written response is usually more effective than frequent unstructured calls, though a polite follow-up after the deadline has passed is reasonable.

A newly registered import business submitted its first VAT return showing a repayment, driven by VAT paid on stock purchased before significant sales began. HMRC opened a registration verification check and asked for supplier invoices, proof of payment and evidence that the business premises and activity were genuine.

The business provided invoices, bank statements showing payment to suppliers, and photographs plus a lease agreement confirming trading premises. HMRC asked one further question about a supplier relationship, which was answered within a week. The refund was released once the evidence was confirmed, several weeks after the original return was filed.

The delay was inconvenient for cash flow, but the outcome shows that a complete, well-organised response to a repayment verification check leads to release of funds rather than an ongoing dispute.