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Interest on underpaid or overpaid VAT

HM Revenue and Customs (HMRC) may charge you interest if you do not report and pay the right amount of VAT. If you pay too much VAT because HMRC made a mistake, you can claim interest.

HMRC only charges or pays simple interest (interest on the original amount, not interest on interest).

There are different interest rates for tax that was underpaid or overpaid before 22 August 2023.

If you pay too little VAT

You may be charged 7.75% interest if you:

  • report less VAT than you charge, or reclaim more than you pay
  • pay an assessment that HMRC later finds was too low
  • you owe HMRC VAT because of a mistake on your VAT Return

Use your VAT online account to check the amount you owe.

HMRC will also send you a notice telling you how much you owe and how it’s worked out.

If you do not pay within 30 days, further interest is charged on the VAT due from the date of the notice. You’ll be charged interest for as long as you do not pay, up to a maximum of 2 years.

You cannot deduct the interest HMRC charges you when working out your taxable profits.

If you pay too much VAT

You may be able to claim 4.25% interest if HMRC’s mistake means:

  • you pay too much VAT
  • you reclaim too little VAT
  • a payment to you from HMRC was delayed

HMRC will not usually repay interest if you’ve paid too much VAT because of a mistake you made.

Interest is usually paid for the whole period from when the VAT was overpaid or reclaimed until the date repayment is authorised.

If you caused a delay to any payments (for example by not claiming straight away) HMRC might leave this time out.

You need to claim the interest separately from the repayment itself.

Write to HMRC with details of the repayment, explaining why you’re owed interest. You must do this within 4 years of the date HMRC authorised the original repayment. Use the postal address on the letter you received from HMRC about your VAT.

Any interest you get from HMRC counts as taxable income.

Paying interest to your customers

You must pay any of the interest you get (as well as the VAT) to your customers if HMRC’s mistake means they paid too much VAT.

Contact the person at HMRC who dealt with your claim if you need to find out how the interest was calculated. This can help you work out how much you need to repay each customer.

You must give the money back to HMRC within 14 days if you cannot get in touch with a customer to repay them.

Challenging an HMRC decision

You cannot appeal the decision to charge you interest but you can challenge the amount of interest charged.

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