Produced by Tolley
  • 16 May 2022 15:12

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 plans 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 on or after 1 January 2023 (delayed from an initial date of 1 April 2022). The legislation underpinning these changes is contained within Finance Act 2021. For details, see the Penalties and interest for late payment guidance note.

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

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