HMRC urged to review repayment interest rates

With data showing that taxpayers face late payment bills that are up to 17 times higher than what is returned to those who have overpaid, HMRC is being urged to look at repayment interest rates.

The Chartered Institute of Taxation (CIOT) is calling on the government to review what they believe to be ‘unfair’ interest rates.

HMRC interest on late payment is generally charged at the Bank of England’s base rate (currently 4%), plus 2.5%. However, interest on repayment from HMRC to individuals and businesses is the base rate minus 1%.

The CIOT highlights that this means there is usually a difference of 3.5 percentage points between the interest charged on late payments by HMRC and that paid by HMRC on repayments.

Explaining an extreme scenario, the CIOT states:

‘This could result in an individual who submits their Self-Assessment tax return for the year 2020-21 on 31 January 2022, claiming a repayment of £5,000, being returned £57 in interest if HMRC do not make the repayment until 28 February 2023, while another who submits their return on the same date but fails to pay a liability of £5,000 until 28 February 2023 could be charged an additional £976 by virtue of their late payment, more than 17 times as much.’

Richard Wild, head of tax technical at CIOT, commented, “The differential between the rate of interest charged by HMRC on late payments, as compared to the interest it pays on overpayments or refunds, is simply inequitable, particularly at times when many businesses and individuals continue to suffer long delays in receiving repayments from HMRC.

“The simple examples in our Budget Representation demonstrate that the costs of paying late, particularly when penalties are considered, can be many times greater when they are charged on taxpayers as opposed to when they are charged on HMRC.

“Unless something is done to bridge the gap between repayment interest and late payment interest, the government will struggle to achieve its objectives of building a trusted, modern tax administration system that is seen as fair and even-handed.”

“It is now twelve years since the government consulted on its general approach to repayment and late payment interest. While some of the findings from the last consultations remain valid, it is right to review whether they remain appropriate.

“We think it’s time to consult to ensure that repayment interest meets the government’s objective to be ‘fair and even-handed’, provides adequate recompense for an individual or business’s loss of money, incentivises HMRC to process repayments in a timely fashion and can apply different rates and processes of repayment interest to different circumstances.”

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