Default interest

Produced by Tolley
Default interest

The following Value Added Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Default interest
  • What is default interest?
  • When is default interest charged?
  • What is an over or under-declaration?
  • Calculating and paying interest
  • Two-year time limit for assessing further interest
  • HMRC delays
  • Issues that could affect default interest charges
  • Transfer of a business as a going concern (TOGC)
  • Deregistration
  • More...

This guidance note provides an overview of the situations when HMRCwill seek to charge default interest on outstanding VAT due by a business. Full details of the default interest can be found in the VDIM1000.

What is default interest?

Default interest was introduced in Finance Act 1985 and was applied to VAT return periods starting on or after 1 April 1990. Default interest was introduced as a way of providing commercial restitution to the Treasury if the taxpayer has over claimed or underpaid VAT and as a result there has been a loss of revenue. Please see VDIM3000 for more information on commercial restitution.

Default interest should not be charged by HMRCin situations where the business has under-declared output tax, but the customer would have been able to recover that input VAT amount in full, had the supplier correctly charged VAT.

When is default interest charged?

A business may be charged default interest where:

  1. VAT has been under-declared on a submitted VAT return

  2. VAT has been over-claimed on a submitted VAT return

  3. a VAT return has not been submitted by the due date and the business has paid the amount assessed as due by HMRCand this is subsequently proven to be too low

  4. a business has submitted an error correction (also referred to as a voluntary disclosure) to HMRCand owes HMRCtax as a result of the error. Please see the Correcting errors guidance note for more information.

If a business has made an error and it considers that default interest should not be charged by HMRCon the amount, it should write to HMRCas soon as possible providing details of the error together with its reasons for believing that no default interest is due. Also, if HMRCdiscovers the error, the business should provide an explanation regarding the background to the error and any mitigating factors that need to be taken into consideration when HMRCassesses whether default interest should be levied. However,

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