In this section:
- What to do if you find a mistake on an earlier VAT return
- VAT returns sent back to you for correction
- Paying interest on late or undeclared VAT payments
- Penalties for mistakes and delays with your VAT
- Claiming interest when we make a VAT payment error
Claiming interest when we make a VAT payment error
If we make a mistake and you pay too much VAT as a result, we'll often automatically pay you interest when we repay the VAT. If we don't pay you interest and you think we should have, you'll need to make a claim. This guide explains how to claim interest, and why you usually have to pass the interest on to your customers. It also explains the situation regarding interest we pay you as a result of a tribunal decision.
On this page:
- Payment of interest if we make a mistake
- Payment of interest if you make a mistake
- Payment of interest when we've both made a mistake
- How we work out the interest
- What happens when we pay you interest
- How you make a claim for interest
- What to do if you don't agree with our decision
- More useful links
Payment of interest if we make a mistake
You might have paid too much VAT because of a mistake we made. When we repay the VAT we'll pay you interest on it as well.
We'll pay you interest if our mistake meant that you:
- accounted for output tax that wasn't due - this won't happen often, because we only pay interest on the net amount after setting input tax mistakes against output tax mistakes
- didn't claim the right amount of input tax against your output tax
- paid VAT that wasn't due
- had to wait an unreasonable time for us to send you a VAT repayment
It's normal commercial practice to pay someone for the use of their money - for example, a business might have to pay interest to its suppliers if it pays them late. The interest we pay you is to make up for us having the use of the money because of our mistake.
Payment of interest if we incorrectly charge you a penalty
We might charge you a penalty and later find that we shouldn't have done. We don't legally have to pay you interest when we repay the penalty to you, but we will pay you compensation. We'll work out the compensation in the same way we would have worked out the interest if we'd paid it.
Interest paid to you if a tribunal finds we made a mistake
If a tribunal finds that we made a mistake when we made a decision relating to your VAT we'll repay the VAT to you. The tribunal might also tell us to pay interest on the VAT and fix the interest rate we should pay.
The tribunal will usually only tell us to pay interest in a few circumstances. These are if you've had to:
- borrow the money
- pay other costs
- lose the use of your own money
You don't have to pass on this interest to your customers.
Payment of interest if you make a mistake
We'll only pay you interest if you've paid too much VAT because of a mistake we've made. We won't pay interest if the mistake was your fault.
This means that we won't pay you interest if you paid too much VAT because you:
- made a mistake on your return
- gave us incorrect information
Payment of interest when we've both made a mistake
You might pay the wrong amount of VAT because we've both made mistakes. In this case, we will still pay you interest when we repay the VAT you've overpaid.
We will always assume that an overpayment caused by our mistake is set off last, after adjusting for your mistakes. We will pay interest on the smaller of:
- the amount of the overpayment caused by our mistake
- the total overpayment for the period
How we work out the interest
The government sets the rate of interest we pay. We only pay simple interest - not compound.
We work out the interest on a daily basis. Normally we'll pay interest for the whole period from when the VAT was overpaid until the date we authorise a repayment, but we'll leave out of the calculation any period when you caused an unreasonable delay in making the repayment. This means that you must make any claims for repayment as soon as possible, and if we need any more information to make a decision on your claim you must provide it within a reasonable time.
What happens when we pay you interest
When we pay you interest we'll include a note to remind you that it's taxable income.
If we pay you interest that you have to pass on to your customers, it's their income, not yours. They'll have to pay tax on it, not you. You'll have to pay tax on any interest you get that you can keep.
Paying the interest over to your customers
If we're paying you interest because you paid too much VAT, you can't keep it - it belongs to your customers. Your customers will have paid you too much VAT because of our mistake, so they'll have lost the use of their money.
You must pay over all the interest to your customers. If you can't pay some of it because you can't get in touch with a customer, you must give it back to us within the 14 day time limit which we give you.
If you need help to work out how much interest to pay to each of your customers, contact your local VAT Business Advice Centre, who will tell you how we calculated the interest for each period. Then you can work out how much interest to pay to each of your customers who paid you in each period.
How you make a claim for interest
If we find that you've paid too much VAT because of a mistake we made, you may not have to make a claim. We'll often add interest to your VAT repayment automatically, without you having to claim it. If we do this, we'll write to tell you.
If you do want to claim interest, you must make your claim:
- in writing
- within three years from the date we authorised payment of the amount you're claiming interest on
What to do if you don't agree with our decision
If we make a decision regarding interest that you feel is due to you and you disagree with that decision, you can appeal. Before a tribunal will hear your appeal, you usually have to pay the VAT we say is due.
Read more about making an appeal against decisions made on your VAT
More useful links
Find out how to avoid mistakes on your VAT returns
Find out about paying interest on underpayments of VAT
Read the guidance we use internally when dealing with claims for interest (PDF, 1.3MB)
