7. Interest on underpaid or overpaid VAT
HM Revenue and Customs (HMRC) may charge you interest if you don’t report and pay the right amount of VAT. If you pay too much VAT because HMRC make a mistake, you can claim interest.
When interest is charged
Interest may be charged if you:
- report less VAT than you charge, or reclaim more than you pay
- pay an assessment that HMRC later find was too low
- let HMRC know you owe them VAT because of a mistake on your VAT Return
How much interest is charged
You’ll be charged 2.75% interest.
There’s a different interest rate for tax that was underpaid before 6 September 2016.
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 don’t 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 don’t pay, up to a maximum of 2 years.
You can’t deduct the interest HMRC charges you when working out your taxable profits.
You may be able to claim interest if HMRC’s mistake means:
- you pay too much VAT
- you reclaim too little VAT
- a payment to you from HMRC was delayed
Normally HMRC won’t repay interest if you’ve paid too much VAT because of a mistake you made.
How much interest can you claim
You can claim 0.5% interest. This is normally paid for the whole period from when the VAT was overpaid or reclaimed until the date repayment is authorised.
There’s a different interest rate for tax that was overpaid before 29 September 2009.
If you caused a delay to any payments (eg by not claiming straight away) HMRC might leave this time out.
You have 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 repayment’s authorisation date. Use the postal address on the VAT correspondence you have from HMRC.
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 can’t get in touch with a customer to repay them.
HMRC only charge or pay simple interest (interest on the original amount, not interest on interest).
Challenging an HMRC decision
You can’t appeal the decision to charge you interest but you can challenge the actual amount.