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Default Interest

Foreword

This notice cancels and replaces Notice 700/43 (February 2003).

Further help and advice

If you need general advice or more copies of our notices, please phone our Helpline on 0845 010 9000. You can call Monday to Friday 08:00 – 20:00 or go to www.hmrc.gov.uk.

If you are hard of hearing or speech impaired, and use a Textphone, phone 0845 000 0200.

Os hoffech siarad â rhywun yn Gymraeg, ffoniwch 0845 010 0300, Llun i Gwener 08:00 – 18:00.

If you have received a charge for an amount to default interest that you believe is not due, you should write to the National Written Enquiry Unit to challenge the imposition of such a charge. Any related enquiry should be sent to:

Southend Written Enquiries

Alexander House

21 Victoria Avenue

Southend-On-Sea

Essex

SS991BD

Other notices on this or related subjects:

700 The VAT Guide

700/45 How to correct VAT errors and make adjustments or claims

1. Introduction

1.1 What is this notice about?

This notice explains how default interest works and when it is applied. It also gives advice about what to do if you think you have been charged too much interest.

You can access details of any changes to this notice since June 2009 either on our website at www.hmrc.gov.uk, or by phoning the Helpline on 0845 010 9000.

This notice is available on our website at www.hmrc.gov.uk

1.2 What is default interest?

Default interest was introduced on 1 April 1990 as part of a balanced package of measures aimed at encouraging a greater degree of accuracy on VAT returns. It is charged on an amount of VAT which has been underdeclared or overclaimed, from the time the amount due should have been paid.

2. How default interest works

2.1 Circumstances in which interest is charged

You may be charged interest where:

  • we find you have underdeclared or overclaimed VAT on your VAT returns, or
  • you fail to render a VAT return for any period, and instead accept a central assessment which is later found to be too low, or
  • you submit an error correction (formerly known as a ‘voluntary disclosure’) to your VAT office for underdeclarations or overclaims of any amount.

In general, however, we will only charge interest where we consider it represents commercial restitution.

2.2 What is commercial restitution?

By ‘commercial restitution’ we mean compensation for the loss of use of any underdeclared or overclaimed VAT.

We will normally only charge you interest if we have been deprived of this VAT for a period of time. We would not, for instance, generally charge you interest if you have underdeclared an amount of VAT which would have been immediately reclaimable as input tax by a third party, as this would not represent commercial restitution.

2.3 Circumstances where interest need not be applied, or an amount chargeable to interest be reduced

If you make an error correction which you think should not attract interest, in part or in full, you should provide us with as much detail as possible about the error, on a separate sheet if necessary, to enable us to make a decision about whether or not interest should be charged as commercial restitution.

Similarly, you should ensure that when we find underdeclared or overclaimed VAT the officer assessing the VAT is made aware of any facts that might have a bearing on an interest charge.

2.3.1 Input tax overclaimed

Generally, overclaims of input tax occur where:

  • evidence of entitlement is not held
  • claims are made too early
  • errors are made within the accounting system
  • claims are made on a non-deductible charge.

Where input tax is claimed by the wrong company, for example, an associated company, interest will only be charged if the other company could not immediately take full credit for that tax.

2.3.2 Output tax underdeclared

NOTE: Any differences in tax period groups (see Notice 700 The VAT Guide) between you and your customer or supplier will normally be ignored when considering the need for commercial restitution.

2.4 When will interest not be charged?

For return net VAT errors discovered during accounting periods starting on or after 1 July 2008, whether or not the error discovered relates to a VAT return submitted prior to this date, and subject to the three year time limit for correcting errors, these can be adjusted subject to the new time limits specified within Notice 700/45 How to correct errors and make adjustments or claims.

A person can adjust their VAT account and include the net value of the adjustment in the VAT return for the period of discovery if the net value of the error does not exceed the greater of:

  • £10,000, or
  • 1% of the box 6 figure required on the VAT return for the period of discovery, subject to an upper limit of £50,000.

As notified within our Business Brief 38/08, our previous policy to not charge interest on the notification of errors on VAT returns with a net value limit of up to £2,000 has now been withdrawn. As a consequence all error notifications (formerly known as Voluntary Disclosures) requiring an assessment may be subject to a default interest charge. This is regardless of the amount involved.

However, net VAT errors below the limit described in the notice may continue to be corrected on a VAT return without incurring a charge to interest.

In addition, interest will not be charged on:

  • VAT declared on returns but unpaid
  • assessments raised because you have failed to render a VAT return (excluding additional assessments)
  • penalties
  • interest, and
  • amendments made to VAT returns before they are fully processed.

There may be other circumstances in which it is inappropriate to charge interest. We do have a measure of discretion but, in equity, this is likely to be used exceptionally, and infrequently. If you believe you should not be charged interest you should apply to the National Written Enquiry Unit at the address provided at the front of this notice under ‘further help and advice’.

2.5 How will I know that I am being charged interest?

If we find you have:

  • underdeclared or overclaimed VAT, or
  • paid an assessment which is later found to be too low,

we will normally send you a Notice of Assessment (VAT655) showing how much VAT you owe and the interest due.

If you have made an error correction notification (formerly a voluntary disclosure) to the National Written Enquiry Unit we will send you a Notification of errors in VAT returns form confirming the amount of your notification and giving the amount of interest calculated on it.

In these cases, you will also get a Statement of Account showing the current balance either payable to us or repayable to you.

In some cases, you may be notified of the interest due separately by letter.

2.6 How is the interest worked out?

The interest is calculated from the date when the outstanding VAT first became due to the calculation date shown on the Notice of Assessment or a Notification of errors in returns form. Where you have made a repayment claim and are then found to have overclaimed VAT, the interest is calculated from seven days after the date we authorised your repayment.

However, interest will be limited to a maximum of three years prior to the date of calculation shown on the Notice of Assessment or a Notification of errors in returns form. This means that while interest may be calculated in respect of any outstanding VAT due after 1 April 1990, it will only be charged for a period of three years prior to the date of calculation.

In practice, interest will be charged, where appropriate, on the net amount of underdeclarations liable to interest, less any overdeclarations for each VAT accounting period.

2.7 What is the rate of interest?

The rate is set by the Air Passenger Duty and Other Indirect Taxes (Interest Rate) Regulations 1998. It will be a simple, not compound, rate and will broadly be in line with commercial rates of interest.

You cannot deduct this interest from your net profit for the purpose of calculating your direct tax liability – the rate of interest is set to reflect this.

2.8 When must I pay the interest?

You should pay any VAT and interest outstanding as soon as you receive one of the notifications referred to in section 2.5.

If you fail to pay all the VAT liable to interest within 30 days of the notification, you will be charged further interest. Interest will continue to be charged on a monthly basis until all the VAT liable to interest is paid. We will normally notify you of these additional interest charges on a VAT658 or VAT659.

2.9 What if I appeal the VAT assessment?

If you do not pay the outstanding VAT before the reconsideration or appeal against an assessment is finalised, interest will continue to be charged. If, as a result of the reconsideration or appeal the original assessment is reduced or withdrawn, the amount of interest charged to you will be recalculated and similarly reduced or withdrawn, as appropriate.

3. Reconsiderations and Appeals

3.1 What if I disagree with the interest amount?

If you disagree with the amount of interest charged, you may ask for it to be reconsidered.

You should write to the National Written Enquiries Unit within 30 days of the date of notification of the interest charge and ask them to reconsider.

The local office will ensure that an officer not involved in the original decision considers the full facts of your case.

3.2 Is there anything else I can do?

If you do not agree with the result of our reconsideration you can appeal to the First-Tier Tribunal to decide the matter. There is more information about what you can do if you disagree with our decision in a HMRC factsheet and customer guidance which can be found at Factsheet HMRC1.

Do you have any comments or suggestions?

We would be pleased to receive any comments or suggestions you may have about this notice.

Please write to:

HM Revenue & Customs

Tax Administration Advice

4th Floor South West

Queens Dock

Liverpool

L74 4AA

Please note this address is not for general enquiries.

For your general enquiries please phone the Helpline on 0845 010 9000.

If you have a complaint

For further information about our complaints procedures go to www.hmrc.gov.uk and under ‘quick links’ select ‘Complaints’.

Source: www.hmrc.gov.uk HMRC Copyright acknowledged