Paying interest on under-declared or over-claimed VAT

HM Revenue & Customs (HMRC) may charge you interest if you don't declare the right amount of VAT.

This guide explains when HMRC may charge you interest and how they work it out. It also tells you what you should do if you think they've charged you too much interest.

On this page:

When HMRC may charge you interest

HMRC may charge you interest if:

  • you've understated or over-claimed VAT on your VAT Returns
  • you don’t submit a VAT Return, you accept the estimated assessment HMRC makes and HMRC later finds the assessment was too low
  • you notify HMRC in writing of an under-declaration or over-claim that you've made

In general HMRC will only charge interest where they consider it to be compensation for the loss of use of the VAT you owe. This means that they won't normally charge you interest if you make an under-declaration and someone else could have immediately reclaimed it as input tax.

More about when and how HMRC charges interest in VAT Notice 700/43

More about correcting errors in VAT Notice 700/45

Why HMRC charges you interest

You can be charged interest for two reasons:

  • to encourage you to complete your VAT returns accurately and completely 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 through under-declaring or over-claiming their VAT

You can check how much interest you owe under ‘Your HMRC Services’ in the VAT Online service. You can view details for the last 15 months of:

  • returns
  • penalties
  • interest
  • surcharges
  • balances brought forward
  • adjustments

If you’ve already signed up for the Business Tax Dashboard, you can also view your liabilities and payments there.

Read more about HMRC’s Business Tax Dashboard

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What happens when HMRC charges you interest

HMRC will normally send you a Notice of Assessment (VAT 655) if they find that you've:

  • under-declared or over-claimed VAT
  • paid an assessment that they later find is too low

The Notice of Assessment will show you how much VAT you owe and how much interest they have charged you.

If you’ve notified HMRC in writing of an error that you’ve made, they’ll normally send you a Notice of Error Correction (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 overall position of your VAT account at the time.

HMRC will sometimes send you a separate letter telling you how much interest you'll have to pay.

More about correcting errors in VAT Notice 700/45

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How to avoid further interest charges

You should pay the full amount due at once. If you don't pay all the VAT due within 30 days of the Notice of Assessment (VAT 655) or Notice of Error Correction (VAT 657), HMRC will charge you further interest from the issue date of the notice and they'll carry on doing so for every month until you've paid all the VAT due. HMRC will tell you if they've charged you this extra interest.

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How HMRC works out the interest

HMRC works out the interest as a percentage of the VAT you owe. They only charge simple interest, not compound. The government fixes the rate of interest they charge - it's usually referred to as the 'statutory rate of interest'. The rate changes from time to time.

You can't deduct the interest HMRC charges you when you work out your taxable profits. That's why their rate of interest is lower than the full commercial rate.

HMRC will only charge interest on the net amount due in the accounting period that is, under-declarations, less any known over-declarations.

When calculating the interest HMRC limit the period for charging interest to no more than three years. This means, for example, that if the accounting period for which the VAT is assessed is four years old they can only charge interest for the three years before the date on the Notice of Assessment (VAT 655) or Notice of Error Correction (VAT 657).

The way HMRC works out the interest depends on whether you've under-declared or over-claimed VAT.

More about when and how HMRC charges interest in VAT Notice 700/43

Interest on VAT under-declared

If you've under-declared your VAT, the Notice of Assessment or Notice of Error Correction will show:

  • the date you should have paid the VAT
  • the date to which HMRC has worked out the interest that is, the day before the 'calculation date'

HMRC will work out the interest for the period from when you should have paid the VAT until the day before the calculation date shown on the Notice.

Interest on VAT over-claimed

If HMRC finds that you've over-claimed VAT, they'll work out the interest from seven days after the date they authorised your repayment until the day before the calculation date.

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What to do if you disagree with the amount of interest

If you disagree with the amount of interest HMRC has charged, you should write to them within 30 days of the date of the Notice of Assessment or Error Correction giving your reasons, for example if you have further information. It doesn't matter whether HMRC found you hadn’t declared enough VAT or you told them about it, you can still ask them to look at your case again.

You also have a right to:

  • Have a review of your case by an officer not previously involved in the matter but you must write to HMRC within 30 days of their decision.
  • Appeal to an independent VAT tribunal. If you want to appeal you must write to the Tribunals Service within 30 days of the decision.

If you opt for a review you’ll still be able to appeal to the tribunal if you disagree with the outcome.

There is no statutory right to ask HMRC for an officer not previously involved in the matter or appeal to the independent Tribunals Service against HMRC’s decision to charge interest.

Contact HMRC

Read how to appeal against an HMRC decision

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When HMRC doesn't charge interest

You won't have to pay any interest if you tell HMRC 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

If you don’t make the adjustment on your VAT Return and submit a form VAT 652 Notification of Errors in VAT Returns instead you may be charged interest.

You won't have to pay interest on:

  • VAT you've shown on your returns but you haven't paid
  • VAT charged in assessments made by HMRC because you didn't submit a VAT Return
  • any penalties you have to pay
  • any interest you have to pay
  • changes you make to your VAT Returns before HMRC has 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

More about correcting errors in VAT Notice 700/45

Getting it right first time

You won't have to pay interest if you get your VAT right first time.

Find out how to avoid mistakes on your VAT Returns

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Claiming interest when HMRC makes a mistake

If HMRC makes a mistake and as a result you pay too much VAT you can claim interest.

Read about claiming interest on VAT overpaid as a result of HMRC’s error

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