By: Money Navigator Research Team
Last Reviewed: 13/01/2026
FACT CHECKED
Quick Summary
Sometimes – but not always. During an HMRC freeze, refunds may still be possible through card processors (where refunds are funded from your processor balance and netted against future sales).
However, bank transfer refunds and other outbound payments can be blocked if the restriction prohibits withdrawals or payments from the frozen account.
The key question is where the refund money is sitting (processor balance vs frozen bank funds) and whether the restriction includes any exclusions that allow payments to keep trading and meet liabilities.
If refunds can’t be processed quickly, chargeback risk typically rises, because customers can escalate through their card issuer’s dispute process even while the bank account is frozen.
This article is educational and not financial advice.
What “HMRC freeze” usually means in practice
“HMRC freeze” is used loosely. In real terms, it usually sits in one of these buckets:
An Account Freezing Order (AFO) made by a court under the Proceeds of Crime Act framework. An AFO can prohibit withdrawals or payments from an account, subject to exclusions. (See the statutory language for “application for an account freezing order” and the court’s power to make exclusions/variations in the relevant provisions of the Proceeds of Crime Act 2002: Application for an account freezing order (s303Z1) and Exclusions/variations (s303Z5).)
HMRC debt enforcement that affects bank access, such as Direct Recovery of Debts (DRD), where HMRC can require banks/building societies to pay HMRC directly in defined circumstances. (See the government’s explanation in Issue briefing: Direct Recovery of Debts.)
A bank-led compliance restriction triggered by the bank’s own controls (often confused with an HMRC action). If the distinction matters in your case, the framing here helps: HMRC enforcement vs bank compliance freezes.
For the “what it is and what it does” baseline in our own guides, see HMRC freeze business bank account.
Can you issue refunds during an HMRC freeze?
Card refunds: often possible, but liquidity can still be the blocker
Many card processors don’t “pull” refund money directly from your bank account at the moment a refund is created. Instead, refunds are commonly funded from your processor balance (or netted against future settlements).
For example, Stripe states that if your available balance doesn’t cover a card refund, it can hold the refund as pending until the balance becomes sufficient (see Stripe: Refund and cancel payments and the support note Stripe: Fix your pending refund). If a bank freeze prevents topping up or stabilising the cash cycle, pending refunds can accumulate.
This is why “refunds are possible” and “customers are receiving refunds quickly” are not the same thing during a freeze.
Bank transfer refunds: commonly blocked unless the restriction allows payments
If the restriction prohibits withdrawals or outbound payments from the frozen account, a bank transfer refund is typically treated like any other outbound payment.
Where the freeze is an AFO, the law explicitly contemplates that exclusions can be made from the prohibition on withdrawals/payments (see Proceeds of Crime Act 2002 – exclusions/variations (s303Z5)). Whether an exclusion exists (and how it is framed) is what tends to govern practical ability to pay.
That means two businesses can both say “HMRC froze our account” and have very different outcomes for refunds depending on the wording and exclusions in the restriction.
PayPal-style refunds: possible, but holds/limitations can add another delay layer
PayPal’s seller help describes how refunds are issued in the PayPal interface (see PayPal: How do I issue a refund?). Separately, PayPal explains that refund posting timeframes vary by payment method and issuer processing (see PayPal: Where is my refund?).
If your PayPal balance is subject to a hold/limitation, that can constrain availability even if the bank account restriction is the headline issue.
What happens if refunds can’t be issued promptly?
When refunds stall, customers often escalate via their card issuer. UK Finance describes chargeback as a card scheme process (distinct from Section 75) that can apply in certain scenarios (see UK Finance: Chargeback and Section 75).
On the merchant side, chargebacks can continue while the bank account is frozen because the dispute process runs through card scheme rails and the acquirer/processor chain. For the freeze-specific mechanics, see Chargebacks when a business account is frozen.
Summary table
| Scenario | Outcome | Practical impact |
|---|---|---|
| AFO prohibits withdrawals/payments; no relevant exclusions | Bank transfer refunds blocked | Refund backlog grows; customer escalations more likely |
| AFO includes an exclusion that permits certain trading payments | Some outbound payments may be permitted | Refund ability depends on the exclusion’s scope and how payments are routed |
| Refunds processed via card processor balance | Refunds can be submitted without bank transfer | Refunds may go pending if processor balance is short |
| DRD removes funds from account | Account may remain operational but with reduced cash | Refund capability depends on remaining liquidity and processor balances |
| Refund delays trigger issuer escalation | Chargebacks raised | Dispute fees/admin increase; processor may hold more funds |
During an HMRC freeze, two separate constraints often collide:
Permission constraint (bank/legal): whether the restriction allows outgoing payments from the frozen account (and on what terms).
Funding constraint (processor/liquidity): whether the processor balance can fund refunds without needing a bank top-up.
Even if permission exists, funding can still fail (insufficient available processor balance). Even if funding exists, permission can still block bank transfer refunds.
For the non-HMRC baseline on processor-led refund behaviour, see Card refunds when a business account is frozen.
Scenario-level / Process-level / Outcome-level
| Scenario-level | Process-level | Outcome-level |
|---|---|---|
| AFO-style HMRC freeze | Prohibits withdrawals/payments, unless exclusions apply | Bank transfer refunds may be blocked; trading payments may be restricted |
| Processor-led refund attempt | Refund funded from processor balance or netted from future sales | Refund succeeds, or becomes pending if balance is insufficient |
| Liquidity stress during freeze | Refunds + disputes draw down processor balance | More pending refunds; higher dispute/chargeback exposure |
| Freeze lifted or varied | Bank rails normalise (or exclusions broaden) | Refund backlog may clear, but processor holds/reserves can persist |
Compare Business Bank Accounts
Different business bank accounts can vary in operational features that matter when restrictions are imposed (how quickly account changes can be actioned, what payment tools are available, and support channels).
This doesn’t mean any provider prevents HMRC-related restrictions, but it can affect the operational experience of managing refunds and settlement during disruption.
See our neutral hub overview: Business bank accounts.
Frequently Asked Questions
Not automatically. A freeze can restrict your bank account’s ability to send payments, but card refunds often run through a processor balance rather than sending a bank transfer at the moment the refund is initiated.
Whether refunds can be processed depends on both the legal/bank restriction and the funding route for the specific refund type.
Yes, because the mechanics differ. A bank transfer refund is an outbound bank payment. If outbound payments are prohibited, that route is usually blocked unless the restriction includes relevant exclusions.
Card refunds can be processor-led. Stripe, for example, explains that insufficient balance can cause a refund to be held as pending until funds are available, which is a funding constraint rather than a bank permission issue (see Stripe: Refund and cancel payments).
An AFO is a court order framework that can prohibit withdrawals or payments from a bank or building society account, subject to exclusions. The legal structure is set out in the Proceeds of Crime Act provisions, including Application for an account freezing order (s303Z1).
It matters because refund capability often turns on whether the prohibition is absolute or whether the order includes an exclusion that permits certain payments.
The legislation provides for exclusions from the prohibition on withdrawals/payments and for variation of an order (see Proceeds of Crime Act 2002 – exclusions/variations (s303Z5)).
Whether refunds fall within any permitted category is fact-specific and depends on the wording and scope of the exclusion.
Refunds can be delayed even if the business is willing to refund. Stripe states that where the available balance doesn’t cover the refund amount, it can hold the refund as pending for card transactions until the balance becomes sufficient (see Stripe: Refund and cancel payments and Stripe: Fix your pending refund).
During a freeze, that “balance becomes sufficient” condition can be harder to reach if payouts are disrupted or if other reversals (refunds/disputes) accelerate.
Yes. Chargebacks are raised via the customer’s card issuer and follow card scheme rules; they don’t rely on your bank account being unfrozen. UK Finance explains the chargeback concept and how it differs from Section 75 (see UK Finance: Chargeback and Section 75).
For the operational effect on the merchant when the bank is restricted, this guide goes deeper: Chargebacks when a business account is frozen.
Not exactly. DRD is a debt recovery power where HMRC can require banks/building societies to pay HMRC directly in defined circumstances, rather than necessarily freezing all account movements. The government outlines how it works in Issue briefing: Direct Recovery of Debts.
Refund impact under DRD often comes down to reduced liquidity rather than a blanket prohibition on payments.
PayPal explains how to issue a refund through account activity (see PayPal: How do I issue a refund?). That mechanism can work independently of a bank transfer refund.
However, PayPal also notes that refund completion timeframes vary by payment method and status (see PayPal: Where is my refund?), and PayPal-side holds/limitations can affect availability even if the bank account is the main disruption.
Customers may see different statuses depending on the payment method and issuer processing. PayPal’s help explains that refunds go back to the original payment method and may take different amounts of time depending on the method (see PayPal: Where is my refund?).
From the merchant side, this can create a support gap: a dashboard can show “refunded” while the customer’s card issuer takes time to post the credit.
Not always. Even after bank rails resume, there can be a backlog of pending refunds or disputes that continue to draw down processor balances and delay “normal” cash flow.
Also, processors can change payout timing and hold behaviour when risk signals shift. This broader explainer helps frame that mechanism: Why payment processors hold payouts during account restrictions.
An HMRC freeze is often misunderstood as “no money moves”, but the practical outcome is usually more specific: the bank account is restricted, while processors and card schemes continue operating.
That can create a mismatch where sales and disputes keep flowing, but refunds depend on (a) whether the restriction permits outbound payments and (b) whether the processor balance can fund reversals without needing a bank top-up.
The pressure point is rarely “refund policy” and more often “refund plumbing”: permission to pay, cash sitting in the right place, and reversals (refunds/chargebacks) draining processor liquidity faster than it can be replenished during restriction.