D1.1215 Restitution interest rate—outline of regime
Where tax has been overpaid by a company (not an individual) as a result of a mistake in law or following unlawful collection of tax by HMRC a restitution award may be made.
Where the award is made to a company that is not a 'charitable company', as a result of a judgment or an agreement between the parties which became final on or after 21 October 2015, the interest element of the award (ie the element which represents compensation for the time value of money), whether arising before, on or after 21 October 2015, is chargeable to corporation tax at a special rate of 45%1 instead of the main rate (see D1.1201)2. The rate does not apply to any element of the award that represents the repayment of the overpaid tax. Prior to 21 October 2015, any restitution interest was taxed at the applicable main rate of corporation tax under the loan relationship rules (see Division D1.7)3.
These rules do not apply to individuals or charitable companies4.
The rationale behind this measure is to ensure that the rate of corporation tax applicable to payments of restitution interest made by HMRC reflects both the rates of corporation tax over the period to which typical awards relate, and the effect of compounding interest not taxed in the year to which it relates. It follows a series of tax cases where the courts have held that the tax authorities must pay compound interest, and not