ECH21560 - Letter of Offer: Forward Interest

Where payment by instalments is accepted, the expected offer (as calculated on a cash basis) must be increased to compensate for the extra risk and cost.

The increase, often known as forward interest is not statutory interest.

Forward interest is payable under the terms of the contract and the consideration for it is the time allowed for payment.

Forward interest is normally calculated by

• applying to the total unpaid balance
• a percentage equal to the current rate of Section 86 interest
• plus one percent for
• half the period of payment

The use of ‘half the period’ reflects the fact that the balance outstanding is progressively reducing.

The SEES programme can be used to produce straightforward calculations.

However, if the offer involves increasing payments or seasonal variations see EM6249 for how to make the calculations.

Forward interest is not allowable as an expense against business profits.

Making Full or Substantial Payment Early

An employer who finds that they can make full or substantial payment early should be encouraged to do so.

If an employer wants to know what amount would have to be paid to make full payment the ECO should

• contact Network Unit to obtain details of payments made
• re-calculate the forward interest
• follow the guidance at ECH22078

Note: The ECO should consider whether the basis of the calculation of forward interest should be more precise due to the lump sum payment making the payments uneven. (EM6249).

If an employer wishes to pay a substantial sum but there will still be a balance payable the ECO should also

• recalculate the dates for the remaining payments.