If you discover that you have overpaid VAT, you may be entitled to a refund. However, this raises the question of the tax status of the additional profit generated by the refund. Is it taxable or not?



This point was contested at the First-tier Tribunal by several retailers that had received VAT refunds relating to overpayments of output tax totalling more than £600 million. HM Revenue and Customs (HMRC) reacted to the refunds by raising assessments for Corporation Tax on them.



The retailers claimed that the refunds were not trading income and should not therefore be taxed.



The Tribunal rejected the retailers’ arguments, ruling that:

• the refunds were trading receipts;
• the amounts were chargeable to Corporation Tax; and
• the interest payments on the refunds made by HMRC were also taxable.

Given the sum at stake, an appeal is almost inevitable.



In the meantime, it would be wise to regard any VAT refunds received as being potentially taxable in the year of receipt.