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HMRC internal manual

VAT Default Interest Manual

Commercial restitution: General principles

Commercial restitution is the compensation required when the Exchequer has been deprived of an amount of VAT for a period of time.

The compensation is charged as interest for loss of use of the money. But if a taxpayer has under declared an amount of VAT which would have been reclaimed as input tax by a third party, there has been no loss to the exchequer.

By restricting interest charges to those cases in which commercial restitution is appropriate, HMRC are exercising their discretion under care and management powers. However such action does not change the statutory basis for interest.

Taxpayers may be charged interest where it represents commercial restitution if:

  • they submit a return or a series of returns which understate(s) their liability to VAT
  • they over claim their entitlement to a repayment
  • they fail to submit a VAT return and accept a centrally issued assessment which is later found to be too low
  • they make an error notification (previously known as a voluntary disclosure) for any amount (the concession not to charge interest on sums below £2000 has been withdrawn)
  • a VAT assessment could have been made but before it was raised they paid any VAT due
  • input tax was claimed by the wrong company (for example, an associated company) and that input tax has been reclaimed more than once
  • a VAT assessment raised to recover input tax they claimed under the reverse charge scheme when they were not entitled to full deduction.

Note: Further examples of VAT assessments which may attract interest are; failure to charge VAT, sales to unregistered persons and input tax not deductible.

Taxpayers should not be charged interest on:

  • VAT declared on returns correctly
  • central assessments (unless manually raised when a long first period return is not submitted)
  • penalties
  • interest previously charged but not yet paid
  • a VAT assessment issued with a Section 67 VAT Act late registration penalty
  • a VAT assessment which has been raised to recover input tax previously claimed by a party who has not paid its supplier, who has made a Bad Debt Relief claim for output tax.