Interest: how interest is calculated: credit or debit interest calculation by COTAX
COTAX automatically calculates credit interest and debit interest and posts the charge on to COTAX when the due date (Word 49KB) has passed and a self assessment has been recorded except where:
- the ‘credit / debit interest’ indicator (CDII) is set to ‘Y’ or
- there is a ‘date struck off’ on record and this date has passed.
You must do the calculation clerically where credit or debit interest is to be given before the normal due date. See COM80080 for further information.
Company is not a quarterly instalment case
If the company is not required to make quarterly instalments payments, credit interest is calculated to the normal due date from the later of the following.
- The first quarterly instalment due date (Word 42KB), or what would be that due date if the company were liable to make such payments.
- The first effective date of payment (EDP) on record.
Company is a quarterly instalment case
Where the company is identified as a QIP case, that is the ‘quarterly instalment payment’ (QIP) signal is set to ‘Y’, both credit and debit interest are calculated on each quarterly instalment.
Credit and debit interest is calculated on the overpaid or underpaid amount from the first quarterly instalment due date for the AP for that quarter to the date on which the over or underpayment no longer exists, that is another payment or repayment is made or a later instalment becomes due.
At this point COTAX recalculates how much that quarter is overpaid or underpaid. It continues to calculate credit or debit interest on this new amount until any of the following happens.
- A further payment is made.
- A repayment is made.
- The next quarterly instalment becomes due.
COTAX continues to review the tax paid at the time of each payment, repayment or instalment due date on the record. This is compared with the amount that the company should have paid at that time and credit or debit interest is calculated on the over or under-paid balance. COTAX continues to do this until the normal due date is reached. It calculates credit or debit interest up to the normal due date inclusive.
However, if the company’s accounting period is linked to an open group payment period for a Group Payment Arrangement, credit or debit interest is not calculated and posted until the group payment period is shown as cleared. See COM30000 and COM96000 for more information.
A payment is not deemed to be paid until midnight of the day it is posted to the AP. This means that:
- credit interest is not calculated on that amount until the following day
- debit interest does not stop until the following day.
Each instalment due date is a non-interest bearing date for that instalment. Interest on each instalment therefore begins the following day.
Detailed worked examples of the calculation of credit and debit interest are available in the Company Taxation Manual (CTM) at CTM92730.