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HMRC internal manual

VAT Statutory Interest Manual

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HM Revenue & Customs
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For what period is statutory interest due: extent of HMRC's liability

The general rule is to pay statutory interest (SI) for the whole of the applicable period, that is, from the date of the erroneous payment (or period of HMRC delay) to the date of authorisation of the repayment of the principal sum on which SI is claimed.

Liability to pay SI does not necessarily cease on correction of the error. To restrict SI to claims made in respect of accounting periods before the error is publicly corrected, (e.g. on issue of a Revenue and Customs Brief) on the basis that the same errors thereafter are the taxpayers, appears harsh and could be open to challenge. Therefore some accounting periods following correction of the error have the potential to be included in the SI calculation. The determining factor is whether or not the taxpayer acted reasonably in finalising their claim and correcting HMRC’s error in their systems.

VATA section 78 (8) provides however, that when determining the applicable period for SI we can leave out of the calculation any period for which the authorisation of payment of the SI is delayed by the conduct of the person making the claim.

This has not always been the case. Prior to the changes made by section 44 Finance Act 1997, statutory interest only stopped during any period covered by any reasonable inquiries into a refund claim.

The Tribunal in North East Media Development Trust - and - C&E Commrs, [1995] VATDR 240 (VTD 13425) challenged this and found that the provision only applied where there were disputes as to the quantum of the claim. It did not apply where no errors where found and questions not asked of the taxpayer.

The legislation was amended to make it clear that any delay caused by the conduct of a taxpayer when checking the validity of the repayment claim would not benefit the claimant. For any period beginning on or after 19 March 1997 section 78(8) provides that:

‘In determining in accordance with subsection (4) (6) or (7) above the applicable period for the purposes of subsection (1) above, there shall be left out of account any period by which the Commissioners’ authorisation of the payment of interest is delayed by the conduct of the person who claims the interest.’

This provision is designed to deal with a taxpayer’s delay and refers only to the conduct of the person claiming the interest and not HMRC. However it is clear that the law is not designed for HMRC to take as long as they like considering a claim. If there are resource shortages or a claim is overlooked then the taxpayer should not suffer the consequences. However we are within our rights to ensure claims are valid before payment.

Provided a taxpayer has behaved reasonably in submitting his claim, both the principal repayment claim and claim for interest, statutory interest should be paid for the whole of the applicable period.

You should only exclude a period if you can clearly demonstrate, to tribunal standard (in the event of an appeal), that delay occurred solely due to the conduct of the taxpayer or the person acting on his behalf.

The amendments brought about by FA 1997 also included subsections (8 A) and (9) to section 78. These provisions cover what is meant by delay and unreasonable delay, see VSIM6300.

VATA s 78 (8)

VATA s 78 (8A)

VATA s 78 (9)