VSIM2200 - The law and legal powers: Examples of when statutory interest is due
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.
This can be illustrated by two examples
Example 1
Due to HMRC error a tax payer accounted for output tax on a zero-rated supply. This resulted in less net VAT reclaimable by the taxpayer on the VAT repayment return than it would have been had the supply been correctly zero-rated. The taxpayer would be entitled to reclaim the over-declared output tax under section 80(1) VATA, the gross output tax over-declared.
In such cases a claim for statutory interest could be made under subsection 78(1) (a). The statutory interest would be calculated on the gross amount claimed after allowing for normal netting off and set off required under section 81(3A) VATA, see VSIM4100.
Example 2
Due to HMRC error a taxpayer was unable to recover input tax. This resulted in the net VAT payable on the VAT return being greater than it should have been had HMRC error not prevented the input tax deduction.
A late claim for input tax could be made under regulation 29, subject to statutory time limits. This is because the taxpayer did not claim the correct input tax entitlement allowed under VATA s25.
In such cases a claim for statutory interest could be made under VATA s78 (1) (b). The statutory interest would be calculated on the gross amount claimed after allowing for netting off and set off required under section 81 (3A) VATA, see VSIM4100.
See VR8000 for detailed guidance on compulsory set-off powers. VSIM4600 confirms that statutory interest is calculated and paid on the net amount overpaid as a result of official error (gross amount after allowing net and appropriate set off)
See VSIM4300 to VSIM6500 for information on the applicable period for payment of statutory interest.