Paying interest on late or undeclared VAT payments

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

This guide explains when HMRC will 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 will charge you interest
What happens when HMRC charge you interest
How HMRC work out the interest
What to do if you don't agree with the amount of interest
When HMRC doesn't charge interest
Getting it right first time
Claiming interest when HMRC makes a mistake
More useful links

When HMRC will charge you interest

HMRC may charge you interest if:

they find you've under-declared the VAT you should have paid on your business income - your 'output tax' - on your VAT Return
they find you've over-claimed the VAT on your expenses - your 'input tax' - on your VAT Return
you don't submit a VAT Return for any period and you accept the assessment HMRC makes, which they later find was too low
you tell them 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. HMRC will normally only charge you interest if they think that it would be normal commercial practice to do so. This means that they won't normally charge you interest if you make an under-declaration and someone else could have immediately reclaimed input tax on it.

What hmrc takse into account when they decide whether to charge you interest depends on whether you've over-claimed input tax, or under-declared output tax.

Why HMRC charges you interest

You can be charged 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

Top

What happens when HMRC charge 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 tell HMRC voluntarily that you've under-declared or over-claimed VAT, they'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 or that you've overpaid and can reclaim.

HMRC will 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, HMRC will keep charging you interest, and they'll carry on charging interest for every month until you've paid all the VAT liable to interest. HMRC will tell you if they've charged you this extra interest.

Top

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 '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 HMRC charges you. That's why their rate of interest is lower than the full commercial rate.

In practice, HMRC doesn't charge all the interest that they legally can. They:

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 HMRC works 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 HMRC has worked out the interest - the 'calculation date'

HMRC will 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 HMRC finds that you've reclaimed too much VAT,they'll work out the interest from seven days after the date they authorised your repayment until the calculation date.

Top

What to do if you don't agree with the amount of interest

If you disagree with the amount of interest HMRC has charged, you can ask them 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 you've been 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.

Contact HMRC

If doesn't matter whether HMRC found you haven't paid enough VAT or you told them voluntarily about an underpayment, you can still ask them to look at your case again.

You'll need to give HMRC all the facts and tell them why you don't think you should pay the interest thhey've charged you. If HMRC agrees, they can decide not to charge you interest on all of the VAT you owe or on just some of it.

If you still think you've been charged too much interest you can appeal.

Read our guide on appeals against decisions made on your VAT

Top

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

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 - 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 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

Top