A new clause has been added to the Finance Bill 2015-16. It allows HMRC to deduct a 45% rate of corporation tax on compound interest which has been awarded to a company in respect of a restitution claim.

The effect of the clause is to impose a new 45% corporation tax charge on compound interest which has been awarded to a company in respect of a restitution claim, and will be effective for all payments where the liability to pay arises, or an agreement is entered into between HMRC and the company, on or after 21 October 2015.

Accountants RSM have already queried the new measure, they say:

"1. Why should HMRC tax the interest at all? After all, restitution interest was intended to remove from HMRC all of the benefits it had received through the overpayment of tax. Many think that it is a bit rich for HMRC to try to claw 45 per cent of that back now.

2. And why 45 per cent? In the normal way, restitution interest would be taxable at no more than the prevailing rate of corporation tax, currently 20 per cent. In the early 1970s, when the tax problem began, the corporation tax rate was as high as 52 per cent. That subsequently fell with many claims relating to periods when the tax rate was no more than 34 per cent.

Advisers to affected companies are already talking about mounting a legal challenge to the latest changes. But here too the HMRC is one step ahead of them: from 26 October 2015 any payments of restitution interest made by HMRC to the companies will have the tax deducted at source. Once again, the companies will find themselves arguing with HMRC to get back tax securely locked away in HMRC’s coffers. Restitution interest on restitution interest, anybody?"

Restitution interest

To be subject to the 45% tax rate, profits must meet the following three conditions:

  • Condition A: the profits are interest in respect of a claim by the company for restitution with regard to either of the following:
    • the payment of an amount to HMRC under a mistake of law relating to a taxation matter, or
    • the unlawful collection by HMRC of an amount in respect of taxation
  • Condition B: either:
    • a court (including a tribunal) has made a final determination that HMRC are liable to pay the interest, or
    • HMRC and the company have entered into an agreement underwhich the company is entitled to be paid the interest 
  • Condition C: the interest due is not limited to simple interest at a statutory rate

Interest includes any amount that is equivalent to interest, that is an amount determined by reference to the time value of money.

A determination is final if it cannot be varied on appeal, for example due to the:

  • absence of right of appeal
  • expiry of a time limit for making an appeal
  • refusal of permission to appeal or
  • abandonment of appeal


The new clause requires HMRC to deduct corporation tax at 45% from interest payments that it makes to companies, and to give them a written notice stating the amount of the payment and the tax deducted.

Small Print

Part 8C, Restitution Interest, will be inserted into the 2010 Corporation Taxes Act.