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HMRC internal manual

Self Assessment: the legal framework

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HM Revenue & Customs
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Payment of tax: automatic interest and late payment penalties: interest charged on late payments of tax

Interest will be charged on any tax paid late

Section 86(1) TMA - Section 101 and Schedule 53 FA 2009 from 31October 2011

A charge to interest automatically arises on any tax paid late, whether income tax, NICs, capital gains tax, or Student Loan repayment. So a charge to interest can arise in respect of:

  • any payment on account (Section 59A)
  • any balancing payment (Section 59B(3) or (4))
  • any tax payable following an amendment to a self assessment, whether made by HMRC or the taxpayer (Section 59B(5))
  • any tax payable in a discovery assessment made by HMRC (Section 59B(6))
  • any tax payable following a postponement (in relation to a discovery assessment or HMRC amendments to a self assessment as the result of an enquiry, see SALF407 and SALF412) (section 55).

Period for which interest charged

Section 86(1) to (3) TMA

For payments on account and balancing payments the interest arises on any sums outstanding between the due date for payment and the date on which payment is finally made.

For amendments to self assessments, and discovery assessments, the interest charge normally runs from the original dates for the relevant tax year (with respect to the balancing payment and any payments on account due) even though the due date for payment of the tax itself may be a later date.

The interest charge arises from the due date even though that date may be a non-business day.

Section 101 and Schedule 53 FA 2009 from 31October 2011

The harmonised interest regime does not materially change the position from under Section 86 TMA. Section 101(3) provides that interest arises between the late payment interest start date and the date of payment. The late payment interest start date is defined in Section 101(4) as the date on which the amount becomes due and payable.

Paragraph 3 of Schedule 53 contains the rules for amendments to self assessments and discovery assessments. It preserves the previous treatment for interest to run from the original date for the relevant tax year even though the due date for payment of the tax itself may be a later date.

Rate of interest charged

The rate of interest charged is the rate set by regulations made under FA89/S178. From 31 October 2011, the late payment interest rate is set under regulations made under Section 103 FA 2009.

Special rules for interest on payments on account of income tax

Section 86(4) to (9) TMA - Section 101 and Schedule 53 FA 2009 from 31 October 2011

The normal interest charge on payments on account arises on the difference between what is actually paid and what should have been paid. In determining these amounts no account is taken of any tax paid on account other than under Section 59A(2) or amounts payable as capital gains tax.

For example, if a payment of £3,500 should have been made on 31 July 2006, but only £2,500 is paid on that date, interest accrues on the balance of £1,000 from 1 August 2006 until the date on which the outstanding payment is finally made.

The amount that should have been paid for any payment on account can never exceed 50% of the relevant amount for the preceding year, even if the income tax for the current year, after taking into account tax deducted at source, exceeds the total of the payments on account. The taxpayer is under no obligation to increase the payments on account even when it is clear that they will be some way short of meeting the full tax liability for the year. So there can be no question of an interest charge on a payment on account simply because the overall liability for the current year has increased relative to the preceding year.

Example: Interest on payments on account and balancing payments

A taxpayer’s self assessment for 2010-11 is £2,000. Therefore the payments on account for 2011-12 are:

31 January 2012 £1,000
   
31 July 2012 £1,000

The self assessment for 2011-12 is £3,000 and any balancing payment is due on 31 January 2013.

Assume that:

  • the payment of £1,000 due on 31 January 2012 is not paid until 1 April 2012
  • only £500 of the payment due on 31 July 2012 is paid at that date
  • the balancing payment of £1,500 due on 31 January 2013 is not paid until 1 March 2013.

Late payment interest arises on:

  • £1,000 for the two months 1 February 2012 to 31 March 2012
  • £500 for the six months 1 August 2012 to 31 January 2013
  • £1,500 for the month 1 February 2013 to 28 February 2013.

Interest charges following an excessive claim to reduce payments on account

Section 86(4) TMA - Paragraph 1(1) Schedule 53 FA 2009

Where there is a claim to reduce payments on account under Section 59A(3) or (4), and following:

  • submission of the taxpayer’s tax return and self assessment for the current year, or
  • an enquiry into the tax return and self assessment for the previous year (on which the payments on account were originally based)

that claim proves to be excessive, there may be an underpayment of tax.

Section 86(5) & (6) TMA - Paragraph 1(2) & (3) Schedule 53 FA 2009

This underpayment is the difference between:

  • the amounts paid as a result of the claim, and
  • the amounts that should have been paid if the claim had been made in the correct amount. The amount that should have been paid cannot exceed 50% of the relevant amount for the preceding year.

Interest arises on any such underpayment of tax

Example: Interest charge following excessive claim to reduce payments on account

A taxpayer’s self assessment for 2010-11 is £4,000. Therefore the payments on account for 2011-12 are:

31 January 2012 £2,000
   
31 July 2012 £2,000

On the basis of a profit forecast at 31 December 2011 the taxpayer makes a claim to reduce these payments to £1,000 each. The reduced payments are both made on time.

When the 2011-12 return is filed on 31 January 2013 the self assessment shows an income tax liability for 2011-12 of £3,750. The balancing payment of £1,750 is paid on 1 April 2013.

Late payment interest arises on:

  • £875 for the 12 months 1 February 2012 to 31 January 2013
  • £875 for the six months 1 August 2012 to 31 January 2013
  • £1,750 for the two months 1 February 2013 to 31 March 2013.

If the income tax liability for 2011-12 had been £5,600, and a balancing payment of £3,600 was paid on 1 April 2013, then Section 86 interest would have been due on:

  • £1,000 for the 12 months 1 February 2012 to 31 January 2013 (£1,000 is the maximum on which interest can be charged as 50% of the relevant amount for the previous year is £2,000, of which £1,000 was paid on account)
  • £1,000 for the six months 1 August 2012 to 31 January 2013
  • £3,600 for the two months 1 February 2013 to 31 March 2013.

Remission of interest charges on excessive payments on account

Section 86(7) to (9) TMA - Paragraph 2 Schedule 53 FA 2009

It may well be that following:

  • submission of the taxpayer’s tax return and self assessment for the current year, or
  • an enquiry into the tax return and self assessment for the previous year (on which the payments on account were originally based)

a taxpayer is entitled to a repayment of tax previously paid on account. But where those payments on account were never made, or appeared to be inadequate a Section 86 interest charge will have arisen.

In such circumstances late payment interest is only chargeable on the amounts that should have been paid if the claim had been made in the correct amount. (Again, the amount that should have been paid cannot exceed 50% of the relevant amount for the preceding year.) Any existing interest charge on amounts in excess of the amounts that should have been paid is mitigated.

Example: Remission of interest charge on excessive payments on account

A taxpayer’s self assessment for 2010-11 is £5,000. Therefore the payments on account for 2011-12 are:

31 January 2012 £2,500
   
31 July 2012 £2,500

After submitting the 2010-11 tax return the taxpayer realises that it contains an error. The first payment on account is paid in full, and on time, but the taxpayer decides not to pay any further amount until the liability for 2010-11 is settled. On 31 September 2012 it is agreed that the liability for 2010-11 is only £3,600. The taxpayer pays a further £1,100 on 1 November 2012.

When the 2011-12 return is filed on 31 January 2013 the self assessment shows an income tax liability for 2011-12 of £4,400. The balancing payment of £800 is paid on 1 March 2013.

If the payments on account had been based on the true liability for 2010-11 they would have been:

31 January 2012 £1,800
   
31 July 2012 £1,800

The taxpayer is entitled to repayment interest on £700 (2500 - 1800) for the six months 1 February 2012 to 31 July 2012.

Late payment interest arises on:

  • £1,100 (1,800 - 700) for the three months 1 August 2012 to 31 October 2012
  • £800 for the month 1 February 2013 to 28 February 2013.

Adjustments to interest charges

Any adjustments to the interest charged are made automatically, in the taxpayer’s statement of account. This statement is updated whenever there is a change in the account, for example when a payment is received, and the statement includes all interest charges.