HMRC late payment interest and effective tax dispute resolution
Low interest rates appear to be behind us, so it has become even more important to think proactively about tax disputes
Low interest rates appear to be behind us, so it has become even more important to think
Though only one facet of tax disputes, late payment interest is often overlooked. But the increasing length of HMRC enquiries and tax appeals and the return to pre-global financial crisis interest rates have brought late payment interest into sharper focus. When should you think about it? What should you do about it?
In most cases, late payment interest is automatically charged at the Bank of England base rate plus 2.5 percent. Currently this is 7.75 percent, versus only 2.6 percent at the beginning of 2022. Interest accrues from when the tax was due to be paid and not, for example, the date on which HMRC open an enquiry or make an assessment. Accordingly, a significant amount of interest can accrue, especially in a long-running or high-value dispute.
No interest will be due if, ultimately, it is agreed or decided that there is no liability to the disputed tax. However, this does not mean that challenging that liability should be the taxpayer or adviser’s sole focus. Appropriate consideration needs also to be given to interest as well as penalties, legal and other professional costs, and future compliance costs.
It is important to understand what the potential interest cost of a tax dispute might be. Central to this is estimating how long the dispute might last, by reference to the typical stages of the enquiry and appeal processes. These stages differ depending on the tax in question (for example, VAT appeals are markedly different from income tax and corporation tax appeals) and the number and complexity of the issues, among other factors.
When the amount of disputed tax can be meaningfully estimated, it is helpful to perform a ballpark interest calculation. This calculation can be reviewed and refined as matters progress.
To manage the potential interest cost of the dispute, it is important to:
- Ensure that HMRC complete their enquiry as soon as reasonably practicable. Essential to this is developing a strategy for progressing the enquiry and anticipating the possible outcomes. This can mean the difference between an unproductive back and forth and a direct and proactive discussion;
- Consider whether to make a payment on account of the disputed tax. This is often mandatory in VAT appeals, but in other cases it will depend on the taxpayer’s particular circumstances. It should be noted that depositing money with HMRC has been less attractive since the abolition of certificates of tax deposit: HMRC now only pay interest if a repayment is due and at a lower rate than they charge on late payments (the higher of 0.5 percent and base rate minus 1 percent); and
- Manage appeal proceedings (or, where applicable, an alternative dispute resolution process) as efficiently as possible.
HMRC have limited discretion to waive all or part of an interest charge if they give erroneous advice or unreasonably delay the resolution of the dispute. Decisions are made by a specialist HMRC team known as the Interest Review Unit. While this process affords some protection, it is no substitute for proactively managing and resolving the dispute in the ways described above.
