Amount on which statutory interest is calculated: interaction of statutory interest law and set off law
Section 81 (1) VATA provides for statutory interest to be treated as an amount due by way of a VAT credit under section 25(3) VATA for the purposes of set-off.
Section 80 (2A) VATA sets against the amount claimed under section 80(1) and (1A) any other errors made in the prescribed accounting periods claimed which didn’t arise out of the mistake giving rise to the claim.
Section 81 (3) VATA requires that we set off against any amounts that we are liable to pay to taxpayers under the VATA, amounts owed by them to us by way of VAT, penalty, interest or surcharge, that is unpaid debts on file.
Section 81 (3A) VATA brings into the equation, for example, input tax that was attributable to the supplies in respect of which output tax is being claimed where it was deducted as a result of the same mistake that led to the over-declaration of the output tax. What’s more, the set-off is not limited only to that input tax that was incurred in the accounting periods for which the claim was made.
As a matter of policy, where a claim does not achieve an advantage not envisaged by the VAT Act and the Principle VAT Directive, the section 81 (3A) set-off should only be applied to liabilities in the accounting period which are covered by the claim, see VR2250.
Under section 130 of the Finance Act 2008, we are entitled to set off against any amount due to a taxpayer under a claim, any amount due to HMRC by way of any debt under any other of the tax regimes for which HMRC is responsible.
However whilst the set-off provided for in section 81 VATA is mandatory, it is a matter for HMRC discretion whether we apply the set-off under section 130. Policy on this aspect of set-off is administered by Debt Management & Banking (DMB). You should always check that no further liabilities (established debts in relation to any of HMRC’s taxes) have arisen since the claim was made. You will find further details on the policy on set-off between taxes and the mechanics of accounting for it in DMBM700000.
Statutory interest is calculated and paid on the gross amount claimed after allowing for normal netting off and set off as appropriate, see VSIM4200. Effectively statutory interest may sometimes be calculated and paid in relation to a higher figure than the net principal amount repaid.
See VR1000 for detailed guidance on VATA section 80 claims.
VR8000 contains detailed guidance on compulsory set off of other liabilities either owed by the taxpayer, or not paid at the time but arising from the same mistake resulting in overpayment.