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If HM Revenue & Customs (HMRC) makes a mistake and as a result you pay too much VAT you can claim interest. This guide explains how to make your claim and the circumstances when you'll 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.
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HMRC will pay you interest if their mistake meant that you:
HMRC will also pay you interest if their mistake meant you had to wait an unreasonable time to receive payment of an amount related to VAT.
You must however make a separate claim for any interest as HMRC doesn't pay it automatically.
HMRC should pay you interest if a tribunal finds they made a mistake in relation to your VAT and as a result they have to repay VAT to you, or pay you the credit you claimed. You shouldn't have to make a separate claim for this interest but you might have to if HMRC doesn't pay it when they repay the VAT. To do this you should write to HMRC to remind them of their obligation following the tribunal decision.
HMRC won't pay interest if the mistake was your fault. However, you might pay the wrong amount of VAT because both you and HMRC made mistakes. In this case, HMRC will pay you the interest on the net amount due to be repaid to you.
The government sets the rate of interest that HMRC pays. 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 repayment. However, they'll leave out of the calculation any period when you may have caused an unreasonable delay in them authorising payment of the VAT repayment or interest claim. This means that you must make any claims for repayment of overpaid VAT and interest as soon as possible, and let HMRC have any information they request without delay.
If you become aware that you've paid too much VAT because HMRC has made a mistake and you want to claim interest you'll need to do all of the following:
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.
If HMRC pays you interest on an amount of VAT that you have to pass on to your customers, you'll also have to pass on the interest to them. This is because your customers will have paid you too much VAT because of HMRC's mistake, so they'll have lost the use of their money. 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 the person within HMRC who dealt with your claim 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.
If you don't have to pass the VAT repayment on to your customers you don't have to pass on the interest.
If you disagree with any decision HMRC makes in relation to your claim for interest you should write to them within 30 days of their decision giving your reasons, for example, further information which may affect the outcome.
You also have a right to have a review of your case by an officer not previously involved in the matter or appeal to the independent Tribunal Service. If you want a review you must write to HMRC within 30 days of the decision. If you want to appeal you must write to the Tribunals Service within 30 days of the decision.
For further information on how to ask for a review or make an appeal and the timescales involved if you and HMRC are unable to agree, follow the link below.
How to ask for a review or make an appeal against an HMRC VAT decision
Find out how to avoid mistakes on your VAT Returns
Find out about paying interest on under-declared or over-claimed VAT
