Interest on mistakes made by HMRC

Produced by Tolley

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

  • Interest on mistakes made by HMRC
  • When will HMRC pay interest?
  • Calculating the interest
  • Applicable period
  • Recovery assessments
  • Interim remedy
  • Making a claim
  • Appeals

Interest on mistakes made by HMRC

IP COMPLETION DAY: 11pm (GMT) on 31 December 2020 marked the end of the Brexit transition / implementation period entered into following the UK’s withdrawal from the EU. At this point in time, key transitional arrangements came to an end and significant changes began to take effect across the UK’s VAT and customs regime. This document contains guidance on subjects potentially impacted by these changes. Before continuing your research, see the Brexit — overview guidance note.

This guidance note provides an overview of the situations when HMRC may be required to pay a business interest due to the fact that it has made an official error which has resulted in the business paying too much VAT.

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 after April 2022. The legislation underpinning these changes is contained within Finance Act 2021.

When will HMRC pay interest?

If HMRC makes one of the following types of errors, it will be required to pay the business interest on the amount. The business has:

  1. 1)

    accounted for output tax incorrectly and as a result, has overpaid VAT and HMRC is required to repay the overpaid VAT

  2. 2)

    did not claim input tax that was entitled to and HMRC is required to repay this input VAT

  3. 3)

    paid another amount of tax to HMRC that should not have been accounted for as VAT

  4. 4)

    suffered delay in receiving payment of an amount due from HMRC in connection with VAT (including, for example, a refund under the DIY builder’s scheme or under (1)–(3) above but excluding any interest due under this provision)

VATA 1994, ss 79, 78; SI 1995/2518, regs 198, 199

HMRC is also required to pay interest to a business if it made a mistake that resulted in the business waiting an unreasonable amount of time

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