BIM45740 - Specific deductions: interest: on late paid tax and NIC

Whether deductions are allowed for interest on late-paid tax and NIC depends on the kind of tax and NIC involved.

Interest on late paid CT

For accounting periods ending on or after 1 July 1999, interest on late paid CT (including quarterly instalments, see paragraph 7(1) SI1998/3175) is brought into account as a loan relationship debit under the loan relationship rules, see CFM5216. The timing of the deduction follows the accounting treatment provided that the accounts are prepared in accordance with generally accepted accounting practice.

For accounting periods ending before 1 July 1999 TMA70/S90 (1) prevented any deduction for interest on late paid CT.

Interest on late paid income tax

Interest on late paid income tax is not deductible in computing trading profits because it is an application of profits after they have been earned and not expenditure incurred for the purpose of earning profits. In addition Section 90 (1) denies relief generally for interest on various types of tax including late paid income tax on business profits.

Interest on late paid PAYE and employers’ NIC

ICTA88/S203 (9) provides that interest on late paid PAYE is not deductible in computing income, profits or losses for any tax purpose. Sub-paragraph 4B of paragraph 6 of Schedule 1 Social Security Contributions and Benefits Act 1992 has the same rule for interest on late paid Class 1, Class 1A and Class 1B NIC.

Contract Settlements

A valid contractual settlement displaces HMRC statutory claims with a debt under contract. The elements of tax, interest and penalty taken into account in arriving at the contractual debt lose their identity in the agreed settlement figure. See CIR v Woollen [1992] 65TC229. An exception is forward interest on instalment settlements, because the forward interest arises on the contractual debt and does not lose its character as interest.

Where a definite part or proportion of the contract settlement is wholly and exclusively incurred for the purposes of the trade (e.g. PAYE or NIC in an employer compliance settlement) then that amount will not fall to be disallowed under ICTA88/S74 (1)(a). See BIM42130 for guidance on the circumstances in which Schedule D expenses may be apportioned.

On the timing of deductions for additional PAYE and NIC taken into account in a contractual employer compliance settlement, see BIM47090.

Amounts relating to penalties cannot be deducted, see BIM42515.