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
Paying interest on late or undeclared VAT payments
We may charge you interest if you don't pay the right amount of VAT.
This guide explains when we'll charge you interest and how we work it out. It also tells you what you should do if you think we've charged you too much interest.
On this page:
- When we will charge you interest
- What happens when we charge you interest
- How we work out the interest
- What to do if you don't agree with the amount of interest
- When we don't charge interest
- Getting it right first time
- Claiming interest when we make a mistake
- More useful links
When we will charge you interest
We may charge you interest if:
- we find you've under-declared the VAT you should have paid on your business income - your 'output tax' - on your VAT return
- we find you've over-claimed the VAT on your expenses - your 'input tax' - on your VAT return
- you don't send us a VAT return for any period and you accept the assessment we make, which we later find was too low
- you tell us voluntarily about under-declarations or over-claims that are more than the error reporting threshold
It's normal commercial practice for a business to charge someone for the use of their money - for example, they might charge interest if a customer pays late. We'll normally only charge you interest if we think that it would be normal commercial practice to do so. This means that we won't normally charge you interest if you make an under-declaration and someone else could have immediately reclaimed input tax on it.
What we take into account when we decide whether to charge you interest depends on whether you've over-claimed input tax, or under-declared output tax.
Why we charge you interest
We charge you interest for two reasons:
- to encourage you to get your VAT payments right first time
- to make a level playing field - it wouldn't be fair if one person got an advantage over someone else by holding onto money and paying their VAT late
What happens when we charge you interest
We'll normally send you a Notice of Assessment (VAT 655) if we find that you've:
- under-declared or over-claimed VAT
- paid an assessment that we later find is too low
The Notice of Assessment will show you how much VAT you owe and how much interest we've charged you.
If you tell us voluntarily that you've under-declared or over-claimed VAT, we'll normally send you a Notice of Voluntary Disclosure (VAT 657). This shows the amount of VAT you owe and the interest you'll have to pay.
In both cases you'll also get a Statement of Account. This shows the total amount you owe us or that you've overpaid and can reclaim.
We'll sometimes send you a separate letter telling you how much you'll have to pay.
Paying the interest
You should pay the full amount due at once. If you don't pay all the VAT liable to interest within 30 days of the notice, we'll keep charging you interest, and we'll carry on charging interest for every month until you've paid all the VAT liable to interest. We'll tell you if we've charged you this extra interest.
How we work out the interest
We work out the interest as a percentage of the VAT you owe. We only charge simple interest, not compound. The government fixes the rate of interest we charge - it's usually referred to as the 'official rate of interest'. The rate changes from time to time.
You can usually deduct any interest you pay when you work out your taxable profits, but you can't deduct the interest we charge you. That's why our rate of interest is lower than the full commercial rate.
In practice, we don't charge all the interest that we legally can. We:
- limit the period for working out the interest to three years at most before the calculation date
- only charge interest on the net amount of the under-declarations, ie after deducting any over-declarations for each VAT accounting period
The way we work out the interest depends on whether you've underpaid VAT or reclaimed too much.
Interest on underpaid VAT
If you've underpaid your VAT, the Notice of Assessment or Notice of Voluntary Disclosure will show:
- the date you should have paid the VAT
- the date to which we've worked out the interest - the 'calculation date'
We'll work out the interest for the period from when you should have paid the VAT until the calculation date.
Interest on VAT over-claimed
If we find that you've reclaimed too much VAT, we'll work out the interest from seven days after the date we authorised your repayment until the calculation date.
What to do if you don't agree with the amount of interest
If you disagree with the amount of interest we've charged, you can ask us to look at it again. Write to your local VAT Business Advice Centre within 30 days of the date of Notice and ask them to reconsider the amount we've charged. They'll make sure that an officer who wasn't involved in making the first decision looks again at all the facts of your case.
If doesn't matter whether we found you haven't paid enough VAT or you told us voluntarily about an underpayment, you can still ask us to look at your case again.
You'll need to give us all the facts and tell us why you don't think you should pay the interest we've charged you. If we agree, we can decide not to charge you interest on all of the VAT you owe or on just some of it.
If you still think we've charged you too much interest you can appeal.
Read our guide on appeals against decisions made on your VAT
When we don't charge interest
You won't have to pay any interest if you tell us about a mistake you made on an earlier VAT return, as long as the net amount of extra VAT due is below the error reporting threshold. In these cases, you should:
- adjust your VAT account
- include the value of the adjustment in your current VAT return
You won't have to pay interest on:
- VAT you've shown on your returns but you haven't paid
- VAT charged in assessments we've made because you didn't send us a VAT return - but this doesn't include additional assessments
- any penalties you have to pay
- any interest you have to pay
- changes you make to your VAT returns before we've fully processed them
There might be some other reason why it would be unfair to charge you interest - but this would only be in exceptional circumstances.
Find out how to correct errors and adjust VAT payments or claims
Getting it right first time
You won't have to pay interest if you get your VAT right first time. Our other guides can help you avoid making mistakes with your VAT.
Find out how to avoid mistakes on your VAT returns
Claiming interest when we make a mistake
If we have made a mistake and overcharged you VAT, or not repaid you all the VAT you are due, you may be able to claim interest.
Read about claiming interest when we make an error
More useful links
More about interest and when and how we charge it in VAT Notice 700/43
