Must VAT refunds to customers be paid by cheque?
One of my clients has incorrectly charged VAT on room hire fees for the last six years; she wrongly thought that her business had opted to tax the building with HMRC, which is not the case. The supplies should have been exempt because no catering or other facilities are provided to the hirers, only the room.
As I understand it, my client needs to submit an error correction form to HMRC for the last four years because the VAT overpaid exceeds £10,000 and she must agree to comply with the conditions of ‘unjust enrichment’, ie all the incorrect VAT will be refunded to the hirers and not retained by my client. However, I am concerned by an apparent contradiction in HMRC’s error correction Notice 700/45:
- para 9.2 says that my client must refund her customers the VAT within 90 days of being paid the money by HMRC; she has no problem with this condition;
- section 10 specifies the undertaking my client must give to HMRC and it says that she must ‘reimburse those persons, in cash or by cheque, all the amount credited by HMRC…’; the cheque or cash condition is silent in para 9.2.
In the modern world of online banking, a cheque repayment outcome seems very outdated and will not be possible for my client because her business bank account does not include a cheque book. Is she obliged to comply with this requirement? What do readers think?
Query 20,711 – Refund Rita.
Capital loss flexibility
My client has capital losses of about £100,000 brought forward from several years ago. These are not ‘clogged losses’ and are therefore available to set against future gains.
She has been to see me about her tax position. In the year just ended, 2025-26, she made a gain of about £120,000 on which business asset disposal relief (BADR) is available. The rate for that year is 14%. This year, 2026-27, she is intending to sell an investment property – the gain is likely to be in the region of £200,000 and will be taxable at 24%.
The question she has asked me is whether she can use the capital loss brought forward against the 2026-27 gain, sidestepping the 2025-26 gain, as this would obviously give her a much greater tax saving, even taking into account the resulting tax payment profile. My initial reaction was to say no, on the basis that losses brought forward are always used in date order, but when researching the legislation there did not seem to be an explicit provision actually saying that.
Can readers help me by explaining the statutory basis for the automatic use of losses in date order or (I can always live in hope) by confirming that what my client would like to do is in fact possible.
Query 20,712 – Optimist.
Homeworking costs
Where a self-employed client works from home, and therefore undoubtedly uses more electricity and other household services while working, I have generally made a conservative estimate of the marginal cost and entered it as an expense in the annual self-assessment return – for example, 10% of heat and light seems eminently justifiable as a cost that is wholly and exclusively incurred on a full-time office, even if it would not be identifiable as such on individual bills. How should this be done under making tax digital for income tax (MTD) – as an annual adjustment, or in respect of each payment of cost, or maybe ‘not at all’? I know HMRC hopes to raise more tax through MTD, and perhaps focusing on such practices as claiming for household bills is one way this might happen. What do other readers do or think on the matter?
Query 20,713 – Atticus.
Too much of a good thing?
I am preparing the R&D claim for a client. I am confident that it is carrying out a project that is eligible for relief, but my question concerns the calculation of the R&D expenditure credit (RDEC) claim. In computing staff costs, employer National Insurance contributions (NIC) are included.
The issue I face is that the company had only two employees, and the NIC that would normally be due on these staff costs is covered by the employment allowance, hence no NIC was actually payable. CTA 2009, s 1123 says that NIC ‘paid’ is a deduction in computing staff costs for RDEC. This seems to imply that in my client’s case the NIC costs cannot be included. But the employment allowance is given as a deduction from the total NIC due rather than allocated on an employee-by-employee basis, so there is still an NIC cost for each employee – the employment allowance is given as a credit at a later stage in the calculation.
Have readers dealt with this issue before? If the employment allowance does reduce the NIC that can be included in the RDEC calculation, it seems that there could be problems in a small company where some employees are engaged in qualifying activity and others are not.
Query 20,714 – Hopeful.
Queries and replies
Send queries and replies to taxation@lexisnexis.co.uk. Replies should be submitted by Monday, 11 days after print publication. We pay £40 for each reply published in the magazine and select those which reflect the widest range of answers. As a result, the views expressed are not necessarily our own and so they should be read with a critical spirit. Contributions may be identified by name or a pseudonym. For full T&Cs visit: tinyurl.com/RFguidelines.
