How VAT default interest works, when HMRC charges it, and what to do if you think we’ve charged you too much interest.
This notice cancels and replaces Notice 700/43 (June 2009).
1.1 Default interest
Default interest was first introduced by section 18 of the Finance Act 1985 and it affects VAT periods starting on or after 1 April 1990.
Initially it’s charged where appropriate on any amount of VAT which has been underdeclared or overclaimed, from the time the amount should have been paid to the time it is assessed.
Default interest is intended to provide commercial restitution for the loss of understated or overclaimed VAT and should not be considered a penalty. What we mean by ‘commercial restitution’ is explained in paragraph 2.2.
2. How default interest works
2.1 Circumstances where interest is charged
You may be charged interest where:
- we find you have underdeclared or overclaimed VAT on your VAT Returns
- you do not render a VAT Return for any period, and instead accept a central assessment which is later found to be too low
- you submit an error correction (formerly known as a ‘voluntary disclosure’) for underdeclarations or overclaims of any amount
In general we will only charge interest where we consider it represents commercial restitution.
2.2 Commercial restitution
By ‘commercial restitution’ we mean compensation for the loss of use of any underdeclared or overclaimed VAT.
We will normally only charge you interest if we have not had the use of this VAT for a period of time. We would not, for instance, generally charge you interest if you have underdeclared an amount of VAT which would have been immediately reclaimable as input tax by a third party, as this would not represent commercial restitution.
2.3 Factors we consider in deciding whether we charge you interest
If you make an error correction which you think should not attract interest, in part or in full, you should provide us with as much detail as possible about the error, on a separate sheet if necessary. This will enable us to make a decision about whether or not to charge interest as commercial restitution.
Similarly, you should ensure that when we find underdeclared or overclaimed VAT the officer assessing the VAT is made aware of any facts that might have a bearing on our decision about whether or not interest should be charged as commercial restitution.
2.3.1 Points you need to remember
Input tax is generally overclaimed where:
- evidence of entitlement is not held
- claims are made too early
- errors are made within the accounting system
- claims are made on a non-deductible charge
Where input tax is claimed by the wrong company, for example, an associated company, interest will only be charged if the other company could not immediately take full credit for that tax.
Output tax underdeclaration examples:
- if you have charged VAT to a customer who is not registered and you have failed to declare it
- arithmetical and accounting errors in your systems
Any differences in tax groups between you and your customer or supplier will normally be ignored when considering the need for commercial restitution.
2.4 When we do not charge interest
We’ve withdrawn our previous policy of not charging interest on the notification of errors on VAT Returns with a value under £2,000. As a consequence all error notifications (formerly known as ‘voluntary disclosures’) requiring an assessment may be subject to a default interest charge. This is regardless of the amount involved. But, net VAT errors below the limit described in Notice 700/45 may continue to be corrected on a VAT Return without incurring a charge to interest. In addition, interest will not be charged on:
- VAT declared on returns but unpaid
- assessments raised because you failed to render a VAT Return (excluding additional assessments)
- amendments made to VAT Returns before they are fully processed
2.5 How to check if you’ve been charged interest
We will normally send you a notice of assessment showing how much VAT you owe and the interest due if we find you have underdeclared or overclaimed VAT, or paid an assessment which is later found to be too low.
If you have made an error notification we will normally send you a Notification of errors in VAT returns form confirming the amount of your correction and giving the amount of interest calculated on it.
In these cases, you will also get a Statement of Account showing the current balance either payable to us or repayable to you.
In some cases, you may be notified of the interest due separately by letter.
2.6 How interest is worked out
The interest is calculated from the date when the outstanding VAT first became due up to the calculation date shown on the Notice of Assessment or on a Notification of errors in VAT returns form. Where you have made a repayment claim and are then found to have over claimed VAT, the interest is calculated from 7 days after the date we authorised your repayment.
But, interest will be limited to a maximum of 3 years prior to the date of calculation shown on the Notice of Assessment or a Notification of errors in VAT returns form. This means that while interest may be charged in respect of any outstanding VAT due after 1 April 1990, it will only cover a maximum period of 3 years prior to the date of the calculation. In practice, interest will be charged, where appropriate, on the net amount, that is, the value of under declarations liable to interest, less any over declarations for each VAT accounting period.
2.7 The rate of interest
The interest rate is set by the Air Passenger Duty and Other Indirect Taxes (Interest Rate) Regulations 1998. It will be a simple, not compound, rate and will broadly be in line with commercial rates of interest.
You cannot deduct this interest from your net profit for the purpose of calculating your direct tax liability, the rate of interest is set to reflect this.
2.8 When to pay the interest
You should pay any VAT and interest outstanding as soon as you receive one of the notifications referred to in paragraph 2.5.
If you do not pay all the VAT liable to interest within 30 days of the notification, you will be charged further interest. Interest will continue to be charged on a monthly basis until all the VAT liable to interest is paid. We will normally notify you of these additional interest charges on a ‘Notice of Assessment of Further Interest form’.
2.8.1 Payments by cheque
All cheque payments by post will be treated as being received by HMRC on the date when cleared funds reach HMRC’s bank account. This means that if you are going to use this method to pay your VAT assessment you will need to allow enough time for the payment to reach HMRC and to clear into HMRC’s bank account within 30 days of the issue date of the assessment notification, in order to avoid further interest charges. A cheque takes 3 bank working days to clear (excluding Saturdays, Sundays, public and bank holidays). This change does not affect any cheque payments made by Bank Giro.
3. Appeals, what to do if you disagree with an HMRC decision
3.1 If you disagree with the interest charge
There is no right to ask HMRC to review their decision or to appeal to the independent tax tribunal against the decision to impose a default interest charge.
3.2 If you disagree with the amount of interest
If you disagree with the amount of interest we have charged you should write to us within 30 days of our decision giving your reasons, for example if you have further information which might affect our decision.
You also have a right to:
- have a review of your case by an officer not previously involved in this matter, if you want a review you need to write to us within 30 days of the date of this decision
- appeal to an independent tax tribunal - if you want to appeal you must write to the Tribunals Service within 30 days of our decision
If you opt for a review you will still be able to appeal to the tribunal if you disagree with the outcome. You do not have to write to us yourself. An accountant or adviser can do this on your behalf.
See more information on review and appeals.
3.3 If you disagree with the VAT assessment the interest charge relates to
If you ask for a review of the VAT assessment we will not take steps to collect the VAT you owe while we are carrying out the review. But interest will continue to run on the amount unpaid. If you appeal to the tribunal you must pay the VAT charged on the assessment unless this will cause you financial hardship.
If, following settlement of the dispute we reduce or withdraw the assessment, we will recalculate the amount of interest chargeable. If this dispute is settled and there is no change to the assessment we will write to tell you the amount of interest you owe, and how to pay it.
3.4 If you have a question about VAT
3.5 Putting things right
If you are unhappy with HMRC’s service, contact the person or office you’ve been dealing with and they’ll try to put things right.
If you are still unhappy, find out how to complain to HMRC.