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HMRC internal manual

VAT Default Interest Manual

Calculation of interest: Rates of interest

Interest is charged at a simple not compound rate, this is in line with commercial rates. Section 197 of the Finance Act 1996 allows for the setting of interest rates according to regulations made by the Treasury.

The relevant regulations are the Air Passenger Duty and Other Indirect Taxes (Interest Rate) Regulations 1998.

The regulations provide for an established rate of interest to be charged. Thereafter the rates are linked to the rate set by the Bank of England’s Monetary Policy Committee (MPC). This forum meets monthly to decide whether a change should be made to the base-lending rate.

The regulations have a formula for setting the rate which is based on a reference rate plus 2.5. The reference rate is calculated as the average of the base rates of six major banks, on a reference date each month. The average is rounded to the nearest whole number (with half rounded down). If this is different from the rate on the previous specified date then the formula are applied.

Current and past interest rates can be checked on the Intranet (see HMRC Interest rates) or on VISION in the ‘interest rate table’. Access to the table is via the ‘VISION MAIN MENU’ screen item number 4.