The planned increase in the interest rate from April is both arbitrary and unjustified.
Somewhat drowned out by the noise of IHT and NIC changes in October’s Budget was a sotto voce increase in the rate of interest charged on late payments of tax. Hitherto, interest on late payment has been charged at 2.5% over base rate and repayment interest allowed at 1% below base rate (with a floor of 0.5%). As HMRC’s website has historically put it: ‘The late payment interest rate encourages prompt payment. It ensures fairness for those who pay their tax on time. The repayment interest rate compensates taxpayers fairly, when they overpay, for loss of use of their money.’ The policy, it is asserted, ‘is in line with the policy of other tax authorities worldwide. It compares favourably with commercial practice for interest charged on loans or overdrafts and interest paid on deposits’. As a policy, that is fair enough.
However, if it currently is (in line) and does (compare favourably), it respectively won’t be and won’t from 6 April 2025, as a result of what looks like an entirely arbitrary and opportunistic 1.5% increase in the late payment differential over base rate, bringing the rate (on the basis of the current base rate of 4.75%) to 8.75%.
If this penal rate were to apply only where a liability to tax had been established and a taxpayer was recalcitrant in coming up with the readies it would, perhaps, be understandable – albeit that FA 2009 Sch 56 imposes penalties for non-payment in those circumstances, and if that sanction is considered ineffective, the obvious solution would seem to be to amend Sch 56 rather than to increase late payment interest rates generally.
But the new rate will not be restricted to those circumstances: it will apply universally. In particular, it will apply even where the delay in establishing the quantum of a tax liability is down to HMRC’s failure to progress matters promptly – sadly, an increasingly common occurrence. It’s possible in these situations to ask for the interest charge to be reviewed, but the request will almost always be rejected. A flavour of HMRC’s approach can be seen from their published guidance in the Debt Management and Banking Manual at DMBM405030:
‘Any delay in making payment, regardless of the cause, is to the customer’s advantage, as the funds are available for their use for an extended period of time. So an interest charge is used to compensate the Government for loss of the use of the funds and to remove any benefit the customer has received, compared to those customers who did pay on time.’
‘It takes time to deal with any part of a customer’s affairs. Some matters may take a short time and others, depending on the difficulty, may take a very long time. But the time it takes HMRC to clear up the various issues being looked at is not seen as a delay no matter how long this may be.’
Until its withdrawal in 2017, the Certificate of Tax Deposit scheme afforded some scope for protection from interest charges on undetermined liabilities. Perhaps now would be a good time for the Government to consider its reintroduction. Until that happens, the work-around would seem to be to make a general payment on account and to persuade HMRC not to make an automatic repayment of any apparent over-payment arising.
Another area in which a problem may be creeping up on taxpayers is in relation to self-assessment payments on account. Any error in estimating current year liability and applying what turns out to be an excessive reduction to payments on account will now carry a much heavier cost than hitherto.
Basis period reform exacerbates the problem. If I am a sole trader or partner, I will be required to make my decision on the January payment on account by reference to numbers that, at best, cannot possibly be available to me until the end of March at the very earliest. And if I have, for example, a December year-end, my decision will be significantly affected by my guess at the results of an accounting year which has barely started. To justify increasing the rate of interest in these circumstances ‘to ensure that people pay on time’ looks not so much like a measure to ‘ensure fairness’ as a revenue-raising measure from a government which has painted itself into a corner.
Home >Articles > The increased interest rate on late payments
The increased interest rate on late payments
The planned increase in the interest rate from April is both arbitrary and unjustified.
Somewhat drowned out by the noise of IHT and NIC changes in October’s Budget was a sotto voce increase in the rate of interest charged on late payments of tax. Hitherto, interest on late payment has been charged at 2.5% over base rate and repayment interest allowed at 1% below base rate (with a floor of 0.5%). As HMRC’s website has historically put it: ‘The late payment interest rate encourages prompt payment. It ensures fairness for those who pay their tax on time. The repayment interest rate compensates taxpayers fairly, when they overpay, for loss of use of their money.’ The policy, it is asserted, ‘is in line with the policy of other tax authorities worldwide. It compares favourably with commercial practice for interest charged on loans or overdrafts and interest paid on deposits’. As a policy, that is fair enough.
However, if it currently is (in line) and does (compare favourably), it respectively won’t be and won’t from 6 April 2025, as a result of what looks like an entirely arbitrary and opportunistic 1.5% increase in the late payment differential over base rate, bringing the rate (on the basis of the current base rate of 4.75%) to 8.75%.
If this penal rate were to apply only where a liability to tax had been established and a taxpayer was recalcitrant in coming up with the readies it would, perhaps, be understandable – albeit that FA 2009 Sch 56 imposes penalties for non-payment in those circumstances, and if that sanction is considered ineffective, the obvious solution would seem to be to amend Sch 56 rather than to increase late payment interest rates generally.
But the new rate will not be restricted to those circumstances: it will apply universally. In particular, it will apply even where the delay in establishing the quantum of a tax liability is down to HMRC’s failure to progress matters promptly – sadly, an increasingly common occurrence. It’s possible in these situations to ask for the interest charge to be reviewed, but the request will almost always be rejected. A flavour of HMRC’s approach can be seen from their published guidance in the Debt Management and Banking Manual at DMBM405030:
‘Any delay in making payment, regardless of the cause, is to the customer’s advantage, as the funds are available for their use for an extended period of time. So an interest charge is used to compensate the Government for loss of the use of the funds and to remove any benefit the customer has received, compared to those customers who did pay on time.’
‘It takes time to deal with any part of a customer’s affairs. Some matters may take a short time and others, depending on the difficulty, may take a very long time. But the time it takes HMRC to clear up the various issues being looked at is not seen as a delay no matter how long this may be.’
Until its withdrawal in 2017, the Certificate of Tax Deposit scheme afforded some scope for protection from interest charges on undetermined liabilities. Perhaps now would be a good time for the Government to consider its reintroduction. Until that happens, the work-around would seem to be to make a general payment on account and to persuade HMRC not to make an automatic repayment of any apparent over-payment arising.
Another area in which a problem may be creeping up on taxpayers is in relation to self-assessment payments on account. Any error in estimating current year liability and applying what turns out to be an excessive reduction to payments on account will now carry a much heavier cost than hitherto.
Basis period reform exacerbates the problem. If I am a sole trader or partner, I will be required to make my decision on the January payment on account by reference to numbers that, at best, cannot possibly be available to me until the end of March at the very earliest. And if I have, for example, a December year-end, my decision will be significantly affected by my guess at the results of an accounting year which has barely started. To justify increasing the rate of interest in these circumstances ‘to ensure that people pay on time’ looks not so much like a measure to ‘ensure fairness’ as a revenue-raising measure from a government which has painted itself into a corner.
