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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.
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HMRC may charge you interest if:
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.
What HMRC takes into account when they decide whether to charge you interest depends on whether you've over-claimed input tax, or under-declared output tax.
More about when and how HMRC charges interest in VAT Notice 700/43
More about correcting errors in VAT Notice 700/45
You can be charged interest for two reasons:
HMRC will normally send you a Notice of Assessment (VAT 655) if they find that you've:
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
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.
From 1 April 2010 all cheque payments by post will be treated as being received by HMRC on the date when cleared funds reach their bank account. This means that if you’re going to use this payment method to pay your VAT assessment you’ll need to allow enough time for the payment to reach HMRC and to clear into their bank account within 30 days of the Notice of Assessment or Error Correction, in order to avoid further interest charges.
A cheque takes three working days to clear (excluding Saturdays, Sundays, public and bank holidays). This change doesn’t affect any cheque payments made by Bank Giro.
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
If you've under-declared your VAT, the Notice of Assessment or Notice of Error Correction will show:
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.
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.
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:
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.
Read our guide on appeals against decisions made on your VAT
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:
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:
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
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
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
