Compensatory interest: background
Compensatory interest was introduced in 1990 to prevent traders using a temporary admission procedure before releasing goods to free circulation from gaining an advantage over traders who import directly to free circulation. It is charged on import duties, but not VAT, and paid on goods entered under an ATA carnet when they are released to free circulation.
This interest is different from default/ statutory interest, that is interest due on an unpaid debt, as detailed in paragraph 7.9 of Notice 199 Imported Goods - Customs Procedures & Customs Debt (HMRC website).
Note: Compensatory interest is charged only on the release to free circulation of goods correctly entered under a carnet. If it is established that, for whatever reason, the goods were not eligible to be entered under a carnet or the carnet holder was not entitled to enter the goods, no compensatory interest is due. Instead penalties for not completing the correct importation procedure should be considered.
Special attention should be paid to verifying the calculation of compensatory interest. By manipulating the period of use and the date of diversion, a carnet holder can reduce or delay the amount of compensatory interest due.