VAT repayments can be withheld under HMRC Time to Pay Arrangements

Many businesses use Time to Pay (TTP) arrangements with HM Revenue and Customs to manage tax liabilities during periods of cash flow pressure. While these plans can be extremely helpful, there is an important condition to be aware of that can have a real impact on business finances.

HMRC can offset VAT repayments against tax debts

If your business is due a VAT refund while you have outstanding tax arrears under a Time to Pay arrangement, HMRC is legally entitled to retain that repayment and apply it toward your existing tax debt instead. This is known as set-off and is a longstanding policy that often surprises businesses that rely on VAT refunds for working capital.

In simple terms, rather than receiving the VAT refund in cash, HMRC can use it to reduce what you owe. It is worth noting that HMRC policy states that officers should fully explain that, wherever possible, the offset will be applied against the outstanding debt.

Impact of set-offs on cash flow

Many businesses expect VAT repayments to help cover payroll costs, supplier payments, rent and overheads, and short-term funding gaps.

When those funds are withheld and used against tax debts, it can create unexpected financial pressure, even when you have been fully compliant with your TTP plan in the past.

Recommendations when considering a TTP

If you are in, or considering a Time to Pay arrangement:

• Don’t rely on VAT refunds for essential cash flow
• Adjust forecasts to reflect possible set-offs

HMRC does state that in exceptional cases officers can agree that VAT repayments are not to be offset in a TTP, due to extenuating circumstances. If this agreement can be obtained, you must have written evidence in case this dispensation is questioned in the future.