Default interest

Produced by Tolley

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...

Default interest

This guidance note provides an overview of the situations when HMRC will seek to charge default interest on outstanding VAT due by a business.

Further guidance can be found in VDIM1000 and in Notice VAT Notice 700/43. In-depth commentary is contained within De Voil Indirect Tax Service V5.364A.

It is worth noting that there are proposals to harmonise the interest rules for VAT to ensure that they follow similar rules to Income Tax Self Assessment. These rules will apply to VAT accounting periods starting after April 2022. The legislation underpinning these changes is contained within Finance Act 2021.

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 HMRC in 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 HMRC and this is subsequently proven to be too low

  4. a business has submitted an error correction (also referred to as a voluntary disclosure) to HMRC and owes HMRC tax 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 HMRC on the amount, it should write

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