VDIM4030 - Calculating liability: Over declarations
This guidance deals with interest matters in respect of prescribed accounting periods starting on or before 31 December 2022. Interest matters with effect from 01 January 2023 are dealt with under Finance Act 2009.
Please see Compliance Handbook page CH140000 onwards to find the new interest rules guidance.
Although interest is charged on under declarations the law does not allow for it to be paid on over declarations.
HMRC allow for over declarations which arise in the same accounting period to be taken into account when calculating the net liability to interest. However the computer is programmed to calculate interest for each document, and so it will only do this automatically if the over declarations are included on the same input document as the interest bearing tax VAT641 or VAT642. Failure to take VAT credits into account can lead to an excessive interest charge.
In the case of the London Borough of Camden (LON/92/2789)
In this case the taxpayer admitted making under declarations of tax but appealed against the interest charged by the department. This appeal was on the basis that the interest had been wrongly calculated because it failed to make allowance for unclaimed input tax which should have been set against the output tax on which the interest had been charged. The tribunal chairman His Hon Stephen Oliver QC agreed that since the taxpayer had previously notified the unclaimed input tax to the Commissioners, the input tax unclaimed for a particular accounting period should be set off against the output tax assessed for the same period when calculating the interest.
The tribunal also decided that only amounts relating to the same prescribed accounting periods could be combined and that any surplus input tax could not be carried forward. However the computer is programmed to calculate interest for each document and so nets off all under and over declarations on the same document irrespective of the accounting periods, in order to reduce the final tax liability and net interest liability. Legal advice has confirmed this practice is just another method of payment.
If an over declaration is notified after an under declaration for the same period, we are not obliged to re-visit any interest assessment already notified in order to make an adjustment for this later over declaration within the interest calculation. This is a point supported by the tribunal chairman in the case of Mackenzie which clarified the Camden decision. Here the tribunal held that although we are obliged to take account of over declarations known to us at the time we make the interest assessment, we are not obliged to subsequently adjust for over declarations relating to the same period that come to our attention after the interest assessment has been made.
Although not obliged to do so, we will in certain cases re-visit earlier interest assessments following the notification of a later over declaration in order to make an adjustment to the interest charged. However so that we are seen to be fair and even handed this is subject to a 3 year limitation period similar to that applied to under declarations under VAT Act section 74(3). It is important to be aware that by doing so, what we are actually doing is waiving some of the interest charge that would otherwise be due. Such action arises out of HMRC’s discretion to assess or not to assess as part of our overall care and management of the tax, but it does not alter the basic liability to interest that is set out in the VAT Act 1994 section 73, 74 and 76. Although the result of such action may be a reduction or refund of an interest charge already notified and in some cases paid, it does not mean that the earlier interest assessment was wrong.
Taking account of over declarations
If you become aware of a case where an under and over declaration has been processed for the same period on separate documents and as a result the taxpayer has been charged too much interest, you will need to take manual action to correct the situation.
You should make an adjustment whether or not the over declaration was notified before or after the under declaration. However you should note that interest has not been overcharged if the over declaration was discovered subsequent to the interest assessment. Default interest will only have been overcharged if when we calculated interest on an under declaration we did not take account of over declarations for the same period (on an officers’ assessment) known to us at that time.
There are however certain over declarations that should not be offset against interest liable under declarations for the same period
- over declarations on which statutory interest under section 78 or interest under section 85A of the VAT Act is made. This is because the taxpayer would receive a double benefit for the error, once in respect of the statutory interest payment and once in respect of their default interest liability. Such over declarations should be inhibited for interest purposes.
- over declarations for a period prior to 1 April 1990. This was the date default interest was introduced and therefore the provisions do not apply to earlier periods.
- over declarations where we have agreed to exclude a related under declaration from the interest calculation.
Adjusting for over declarations
If an over declaration has been notified separately from an under declaration for the same period and as a result too much interest has been charged, you will need to take manual action to correct the interest charge. However you only need take such action if the over declaration is not inhibited and if it has not already been off set against any other under declaration.
You will need to take manual action to correct the interest charge if
- at the same time you are assessing for an under declaration you are aware that an over declaration has already been processed for the same period, or
- at a later date an over declaration is notified for the same period an interest liable under declaration has been assessed.
The action you will need to take in such cases will depend on the value of both the under and over declaration.
Under and over declarations for the same amount
If both the under and over declaration are for the same amount you need to take the following action
- input two VAT 643s one for the under declaration and one for the over declaration
- set the interest inhibit to 1 on each of the VAT 643s .
Guidance on the completion of the VAT 643 can be found in VAEC9000. The amended output document for the under declaration assessment will then show the amended interest.
Under and over declaration for different amounts
In this situation you will need to reduce the interest bearing tax amount, see VDIM4020 by completing a VAT 663 by the relevant amount on the assessment containing the under declaration, see VDIM8000. In such cases no output document will be produced by the mainframe computer and you will need to let the taxpayer know the result in writing.