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Last updated: 3 Mar 2021
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Spring Budget 2021: VAT - Harmonisation of interest

The latest legislation aligns the interest rules for VAT with similar rules to those for Income Tax self-assessments (ITSA). Interest in VAT includes charges to taxpayers for underpaid or over claimed VAT, as well as payments to taxpayers.

The change to interest for VAT means that late payment interest will also apply to late VAT returns and VAT payments on account. Late payment interest (LPI) will be payable from the date that payment became due until the date it is received by HMRC. It will also apply, as it does now, to VAT assessments where tax has been underpaid. LPI will be calculated as simple interest at a rate of 2.5% + the Bank of England base rate.

Additionally, repayment interest (RPI) will replace repayment supplement. Interest will be payable to the taxpayer either from the last day the payment was due to be received or the day it was received, whichever is later, until the date the repayment to the taxpayer is authorised or offset. RPI will be paid at the Bank of England base rate less 1% (with a minimum rate of 0.5%). Where a VAT repayment return has been received HMRC will not pay interest:

  • for periods of reasonable enquiry where a full response has not been received
  • for periods where HMRC needs to correct errors or omissions in the return
  • where security has been requested and not provided.

About the author

Linda Skilbeck

+44 (0)20 8037 3114
skilbeckl@buzzacott.co.uk
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The change to interest for VAT means that late payment interest will also apply to late VAT returns and VAT payments on account. Late payment interest (LPI) will be payable from the date that payment became due until the date it is received by HMRC. It will also apply, as it does now, to VAT assessments where tax has been underpaid. LPI will be calculated as simple interest at a rate of 2.5% + the Bank of England base rate.

Additionally, repayment interest (RPI) will replace repayment supplement. Interest will be payable to the taxpayer either from the last day the payment was due to be received or the day it was received, whichever is later, until the date the repayment to the taxpayer is authorised or offset. RPI will be paid at the Bank of England base rate less 1% (with a minimum rate of 0.5%). Where a VAT repayment return has been received HMRC will not pay interest:

  • for periods of reasonable enquiry where a full response has not been received
  • for periods where HMRC needs to correct errors or omissions in the return
  • where security has been requested and not provided.
What does this mean?

What does this mean?

The change to interest for VAT brings it into line with other taxes. The addition of interest for late returns will, to some extent, offset the reduction in penalties for late payment. It remains to be seen whether repayment interest will be any easier to claim than repayment supplement was for returns held up by HMRC enquiries, given that they have usually held that they are making “reasonable enquiries” and it is very difficult to prove that a response is full enough to satisfy HMRC.

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