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HMRC internal manual

Enquiry Manual

HM Revenue & Customs
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Contract Settlements: Interest: Basis of Calculation

The guidance about contract settlements at EM6000+ only relates to direct tax. You must never include VAT or VAT penalties in a contract settlement.

Interest should be calculated as though the correct liabilities had been assessed and had become final for all years.

Unless all the tax and NIC have been paid on account, you will have to estimate the likely date of payment and calculate the interest up to that date. Any material delay in settlement will normally necessitate revision of the interest figure and you may think it worthwhile to give a daily or weekly figure for the accruing interest when you issue your computation.

You should use the computer programs provided to calculate interest.

Payments on Account

Payments on account sometimes cause difficulties. The strict rule is that interest is chargeable on a specific amount of tax or NIC from the interest relevant date to the date of payment. However, it is usually convenient to calculate the interest as if nothing had been paid on account and then deduct a ‘credit’ by reference to the amount paid.

This method produces the correct answer where

  • the payment does not exceed the interest-bearing tax and NIC, and
  • where none of the tax or NIC which it covers has a relevant date after the payment was made.

If either of these factors is really significant you should make a more precise calculation, assessment by assessment, allocating the payment(s) on account against the interest-bearing liabilities in chronological order.

Once an enquiry is under way it is not uncommon for the taxpayer to make a payment on account against a discovery assessment which exceeds the ultimate liability on that assessment. Sometimes, also, a general payment on account is mistakenly credited to an assessment or SA statement with the result that, strictly, repayment becomes due. In such cases, the ‘excess’ payment is to be treated for interest purposes as having been paid on account against other interest-bearing liabilities, thus giving the taxpayer a greater measure of relief than would a repayment supplement calculation. SAM/COM explains how to reallocate a payment.