HMRC published a further consultation on interest and penalties, 'Making Tax Digital: Interest harmonisation and sanctions for late payment'.

What's new?

HMRC have responded to this consultation, published a policy paper, 'Interest harmonisation and sanctions for late payment', and draft legislation has been included in Finance Bill 2018-19.


This follows recent consultations on: 

The new consultation also aims to bring into line interest on Corporation Tax and VAT, in order to align it with the Finance Act 2009 Schedule 56 late payment rules.

As proposed, the new system will allow no late payment penalties if the taxpayer has a reasonable excuse for late payment.

  • Taxpayers who have no reasonable excuse for late payment will have 15 days to pay the tax or organise a Time To Pay arrangement (TTP).
  • If a payment is made or TTP organised in days 16 to 30, the 5% penalty will be halved.
  • After 30 days a 5% penalty will be charged and an interest-based calculation will also apply from day 30 onwards.

The interest will be based on the UK Bank of England (BoE) Base Rate and is currently set as 2.5% above base for interest charged by HMRC and 1% below base (subject to 0.5% floor) for interest paid by HMRC.

Corporation Tax and interest

  • It is believed that the current rules adequately mirror the Finance Act 2009 rules, with the exception of the Quarterly Instalment Payments (QIPs).
  • HMRC are of the view that the QIPs should remain under a different regime as they are estimated taxes.
  • There is therefore likely to be little or no change.

VAT and interest

  • The current rules on late VAT payments penalties include the following:
    • Default surcharge, which increases depending on the number of failures in a surcharge period.
    • Default interest on late payments to HMRC.
  • The current rules also allow for the following on refunds:
    • Statutory interest on late payments from HMRC.
    • Repayment supplements on some delayed repayments from HMRC.

These rules will be replaced.

Proposed new rules

  • Interest on late payments of VAT on returns
    • The rules will be made to mirror the Finance Act 2009 rules, i.e. interest will accrue on the outstanding amount from due date until payment date.
  • Interest on amendments
    • The Finance Act 2009 rules will be mirrored.
    • Interest will be charged on the basis that the correct return was filed on the due date and will accrue from due date until payment date.
    • Where an amendment results in a refund, repayment interest will be calculated from the date the amended return is received or the date of overpayment, whichever is later. Interest will accrue until the refund is made.
  • Interest on assessments
    • Where a return is not filed on time, HMRC may issue an assessment. Interest will be charged on the assessment amount.
    • If a return is submitted on time to replace the assessment, the interest will be cancelled and replaced with recalculated interest based on the actual return.
    • If any interest payment was made on the assessment amount, this payment will be allocated against the VAT due on the actual return first, to limit the interest chargeable.
    • The government will retain the policy not to charge interest in cases where it would not constitute restitution for HMRC. For example, where HMRC assess output VAT on a taxpayer but there will be a corresponding input VAT recovery by the customer of the taxpayer. HMRC would not seek to charge interest in these circumstances.
  • Delayed repayments
    • The 5% repayment supplement will be removed. Instead, it will be a straightforward interest approach.
    • The 30-day rule, allowing HMRC to investigate a refund and satisfy themselves it is due before any interest or repayment supplement accrues, will also be removed. Instead, HMRC will be given sufficient time to make reasonable enquiries and interest will not accrue until a full and complete response is received.
    • No interest will be paid where other returns are outstanding.

Late payment penalties

In addition to interest, it has been decided following previous consultations that penalties should also be charged, particularly given the preferential interest rate of 2.5% above base when compared to commercial lenders.

The key proposals on late payment penalties, are as follows: 

  • Reasonable excuse and time to pay arrangements (TTP) will be available.
  • Where there is no reasonable excuse or TTP, then the late payment penalty should apply in addition to interest.
  • To avoid double-counting, the BoE base rate will not be used as a reference within the penalty calculation.
  • If payment is made or TTP arranged within 15 days, the penalty will be nil.
  • If payment is made or a TTP arrangement made between 16 and 30 days, the penalty will be halved.
  • A 5% penalty will be charged after 30 days, subject to the above.
  • An additional penalty, calculated in a similar way to interest, but not based on the BoE base rate, will begin to accrue after 30 days.

Special circumstances

  • Where returns are late and an assessment is made, the penalty will be based on the assessment until replaced with the actual return. The penalty will then be recalculated.
  • For amended returns, penalties will be charged from the amendment date or payment due date relating to the amended return.
  • Payments on accounts will not be subject to late payment penalties.

The consultation will close on 2 March 2018. The full consultation document can be found here. Legislation is expected in Finance Bill 2018-19.

Summary of questions

Question 1. Do you agree that in-year Quarterly Instalment Payments (QIPs) should continue to attract differential interest rates?

Question 2 – Do you agree the way interest is charged for Corporation Tax (CT) satisfactorily mirrors the rules contained in FA09?

Question 3 – If you do not agree please explain why.

Question 4 – Do the proposals for interest for VAT on late payment of a return reasonably reflect the FA09 rules?

Question 5 – Are the proposals for VAT regarding interest on assessments and amendments sensible?

Question 6 – Do the proposals for interest on a delayed payment of a repayment VAT return reflect the right balance between recompense for customers and the protection of public monies?

Question 7 – Do the proposals for late payment penalties strike the right balance between fairness for those that pay on time and provide a reasonable time for those that need it to arrange payment?

Question 8 – Do you think these general rules provide the correct balance between protecting those that pay on time and encouraging and supporting those that do not?

Question 9 – Do the proposed rules provide the correct balance between protecting those that pay on time and encouraging and supporting those that do not?

Question 10 – We believe that late payment penalties should apply from the payment due date. What difficulties, if any, could you see with this?

Question 11 – Are there any other specific circumstances that should be accounted for?