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HMRC internal manual

VAT Statutory Interest Manual

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HM Revenue & Customs
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Amount on which statutory interest is calculated: examples

VSIM4100 sets out the principle of the amount on which statutory interest should be calculated and the practical affect of this is shown in the examples below.

VSIM4600 explains the interaction of SI law and set off law.

Example 1 (set-off - section 80(2A) of the VAT Act 1994)

A taxpayer makes a claim (under section 80(1) of the VAT Act 1994 for a £100,000 over-declaration of output tax which was made over the last four years as a result of an official error. Over the same four year period the taxpayer has made over-claims of input tax amounting to £15,000 which are unrelated to the over-declaration mistake for which the claim was made.

A separate assessment for the over-claimed input tax should be made but in any event the £15,000 over-claim will be set off against the £100,000 claim by section 80 (2A) so the claimant is paid £85,000.

In this example SI should be calculated by reference to the net amount payable to the taxpayer, not the amount claimed - the £85,000 not the £100,000

Example 2 (set-off sections 80(2A)and 81(3) and 81 (3A) of the VAT Act 1994

A taxpayer makes a claim (under section 80(1) of the VAT Act 1994 for £100,000 over-declaration of output tax which was made over the last four years as a result of an official error. Over the same period the taxpayer made over-claims of input tax amounting to £15,000 which were not as a result of the same official error and so are unrelated to the over-declared output tax for which the claim was made

Over the same period the taxpayer, on the same mistaken assumption that output tax was properly due on the supplies in question, also wrongly deducted as input tax £5,000 in VAT that he incurred in making those supplies.

The £15,000 of unrelated over claimed input tax is set against the £100,000 claim under section 80(2A) reducing the amount due to the taxpayer on the claim to £85,000.

Because the £5,000 input tax was wrongly deducted as a result of the same mistake that gave rise to the claim, that is also set against the amount claimed by section 81(3) as required by section 81 (3A). The amount payable to the taxpayer is therefore further reduced to £80,000.

In this example SI will be calculated by reference to the amount payable to the taxpayer -£80,000 not the amount claimed (£100,000).

There are also unpaid assessments already on the VAT ledger unconnected to the claim amounting to £10,000; which under section 81(3) will later be set off against the total amount payable to the taxpayer i.e. the £80,000 plus the SI amount.

Example 3 (set - off section 81(3) and 81(3A))

A taxpayer makes a claim on 17 March 2013 for £100,000 output tax over-declared in the prescribed accounting period ending on 31 March, 30 September and 31 December 2009, 30 June and 30 September 2010, 31 March and 31 December 2011 and all four accounting periods in 2012. All of these over-declarations were made as a result of an official error.

There are over-claims of input tax amounting to £30,000 in the accounting periods ending on 30 June and 30 September 2011 which were made as a result of the same mistake that gave rise to the claim.

There are over-claims of input tax unrelated to the claim amounting to £20,000 in the accounting periods ending on 30 June 2009 and 31 March 2010 (taxpayer error and so a different mistake).

The over-claims of input tax totalling £30,000 were made in accounting periods that were not covered by the claim, but because they arose out of the mistake that gave rise to the claim, they will be set off against the amount of the claim under section 81(3) as required by section 81(3A) on the grounds that the taxpayer has cherry picked the accounting periods he has claimed for in attempt to get back more than he is properly entitled to.

In this example SI will be calculated by reference to the amount payable before any further set off i.e. on £70,000 not on the amount claimed (£100,000).

The unrelated over claims of £20,000 input tax cannot be set against the claim under section 80(2A) because they were made in prescribed accounting periods not covered by the claim, but if they are in time for assessment and can be assessed, they must be considered separately for Default Interest (DI) under section 74 VAT Act 1994; a separate accounting mechanism. These assessments will be later set off under section 81(3).

VATA s78

VATA s81