Thousands claiming VAT payments

The claims came after a landmark case in the House of Lords

Thousands of companies made claims from the tax authority totalling £8.5bn for refunds of overpaid VAT, figures show.

So far, HM Revenue and Customs (HMRC) has repaid £1.5bn and £4.8bn has been set aside for repayments.

About 60% of claims - which came as a result of a long legal battle which the government lost - have not qualified for refunds, the HMRC has revealed.

Some 13,000 claims were made for backdated overpaid VAT before a HMRC deadline at the end of March.

'Fleming' cases

The figures refer to an episode that began when, in 1996, the government said that the tax authority would only refund overpayments of VAT backdated for up to three years. Previously, this had been six years.

The lesson for any government is that they should not just make changes retrospectively to tax laws without thinking through the consequences Chas Roy-Chowdhury, ACCA

However, the three-year cap was thrown out following a legal battle that went to European judges and ended at the House of Lords.

In the light of the decision, the Lords gave companies until the end of March 2009 to make any additional backdated claims - which became known as Fleming claims, named after the person fighting one of the legal cases.

Companies might have overpaid VAT for a variety of reasons. Examples included sports clubs that overpaid VAT on membership fees, companies overpaying VAT on staff entertainment or new companies paying too much when they set up.

Many thought they had a chance of the windfall and HMRC is still working through the thousands of claims, but the authority is understood to regard pay-outs so far as within expectations.

"The lesson for any government is that they should not just make changes retrospectively to tax laws without thinking through the consequences," said Chas Roy-Chowdhury, of the Association of Chartered Certified Accountants (ACCA).

Separate figures reveal that the level of fraud and error in the tax credits system has risen to a level of between 8.6% and 10.6% of total claims.

Figures released by the Treasury showed that the level of fraud and error equated to between £1.75bn and £2.12bn.

HMRC has been set a target to cut the rate of fraud and error to 5% by 2011.