In this section:
- What to do if you made a mistake on an earlier VAT Return
- VAT Returns sent back to you for correction
- Paying interest on late or undeclared VAT payments
- Interest when HM Revenue & Customs makes a VAT payment error
Interest when HM Revenue & Customs makes a VAT payment error
If HM Revenue & Customs (HMRC) makes a mistake and you pay too much VAT as a result, they will often automatically pay you interest when they repay the VAT. If they don't pay you interest and you think they 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 HMRC pays you as a result of a tribunal decision.
On this page:
- Payment of interest if HMRC makes a mistake
- Payment of interest if you make a mistake
- Payment of interest when both you and HMRC have made a mistake
- How HMRC work out the interest
- What happens when HMRC pay you interest
- How you make a claim for interest
- What to do if you don't agree with an HMRC decision
- More useful links
Payment of interest if HMRC makes a mistake
You might have paid too much VAT because of a mistake made by HMRC. When they repay the VAT they'll pay you interest on it as well.
HMRC will pay you interest if our mistake meant that you:
- accounted for output tax that wasn't due - this won't happen often, because they 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 them 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 HMRC pays you is to make up for them having the use of your money because of their mistake.
Interest paid to you if a tribunal finds HMRC made a mistake
If a tribunal finds that HMRC made a mistake when they made a decision relating to your VAT they'll repay the VAT to you. The tribunal might also tell them to pay interest on the VAT and fix the interest rate they should pay.
The tribunal will usually only tell HMRC 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
HMRC will only pay you interest if you've paid too much VAT because of a mistake they've made. They won't pay interest if the mistake was your fault.
This means that they won't pay you interest if you paid too much VAT because you:
- made a mistake on your return
- gave HMRC incorrect information
Payment of interest when both you and HMRC have made a mistake
You might pay the wrong amount of VAT because both you and HMRC made mistakes. In this case, HMRC will still pay you interest when they repay the VAT you've overpaid.
They will always assume that an overpayment caused by their mistake is set off last, after adjusting for your mistakes. They'll pay interest on the smaller of:
- the amount of the overpayment caused by their mistake
- the total overpayment for the period
How HMRC works out the interest
The government sets the rate of interest that HMRC pay. They only pay simple interest - not compound.
They work out the interest on a daily basis. Normally they'll pay interest for the whole period from when the VAT was overpaid until the date they authorise a repayment, but they'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 HMRC needs any more information to make a decision on your claim you must provide it within a reasonable time.
What happens when HMRC pays you interest
When HMRC pays you interest they'll include a note to remind you that it's taxable income.
If HMRC pays 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 HMRC is 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 HMRC's 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 HMRC within the 14 day time limit which they 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 HMRC 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 HMRC finds that you've paid too much VAT because of a mistake they made, you may not have to make a claim. They'll often add interest to your VAT repayment automatically, without you having to claim it. If they do this, they'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 HMRC authorised payment of the amount you're claiming interest on
What to do if you don't agree with an HMRC decision
If HMRC makes 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 that HMRC says 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)
