Contract Settlements: Interest: General
The guidance about contract settlements at EM6000+ only relates to direct tax. You must never include VAT or VAT penalties in a contract settlement.
At the time you provide the taxpayer with your calculation of tax and NIC lost, you should also calculate the interest arising. Any such interest should be calculated up to the anticipated date of payment in the settlement offer.
You may need to emphasise to the taxpayer that interest is not a penalty. Interest is charged on tax which is paid late in order to
- encourage payment at the right time
- compensate the Exchequer for the delay in payment, and
- remove the advantage which those who pay late would otherwise enjoy over those who pay at the right time.
Interest is charged at a rate based on a broad average of the net cost of borrowing and provides normal commercial restitution for the delay - just as repayment supplement/interest is intended to compensate the taxpayer.