Businesses need to pay interest on underpaid or on overpaid VAT. Failing to report, or pay the correct amount of tax, means HM Revenue and Customs will charge VAT interest.
VAT INTEREST: HMRC may also make an error which causes you to pay too much tax. In this case, you can claim interest on the amount of the mistake.
As a rule, you get charged interest by HM Revenue and Customs if you:
The interest charge is 3% per annum. A different interest rate applies if the tax was underpaid before the 6th of September 2017. You can log in to the company VAT online account to check the tax amounts owed to HMRC.
HMRC will send a notice informing you the amount due. It will also have the calculations used to make up the amount. Payment must get made within 30 days from the date of the notice. Failure to do so will incur further interest charges.
Interest charges continue until full payment gets made - up to a maximum of 2 years of interest. The interest is on tax which means it cannot get deducted from company taxable profits.
If HMRC make a mistake you can also make a claim for an interest payment. A claim means you have paid too much or reclaimed too little VAT. In can also occur if there is a delay in payment by HMRC.
As a rule, HM Revenue and Customs will not pay interest because of a mistake that you made even if you paid too much tax.
The interest on claims is 0.5% per annum. Payments cover the period from when the tax was overpaid or reclaimed up to the authorised repayment date.
Note: A different rate applies on overpaid tax before 29 September 2009.
If you do not claim immediately, or cause any other delay, HMRC may consider the received date as the start date of the claim. You should claim interest as a separate entity to the repayment form.
Send the details of the repayment to HMRC. Explain why you think they owe you interest. There is a 4 year limit from the repayments authorisation date to make a claim. The VAT correspondence from HMRC has the address for sending a claim for interest.
If HMRC make a mistake the interest you receive must get passed on to your customer if they paid too much tax. This includes any excess VAT paid by them.
What if you are unable to work out how to calculate the interest? In this case you can contact the HMRC staff member who processed your claim. They will let you know how much to pay back to each customer. The monies must get returned to HMRC within 14 days if you are unable to contact a customer.
The type of interest HMRC pay or charge is 'Simple Interest'. The interest gets based on the original amount. It is not 'Compound Interest'. That would be interest on the original amount plus interest on any interest already accumulated.
There is no appeals process for a decision made by HMRC to charge interest. But you can challenge the actual amount charged to you by HM Revenue and Customs if you disagree with a tax decision.
VAT Returns: Information explaining the quarterly 'accounting period' for small businesses.
Send a VAT Return: How to submit a return online to HM Revenue and Customs.
VAT Payment Deadlines: Checking VAT Return and payment deadlines in the online account.
VAT Assessment: Send your VAT Return and any payment due immediately.
VAT Returns Interest Rates in the United Kingdom