Policy paper

Technical changes to late payment interest, late payment penalties, and repayment interest rules for VAT

Published 15 March 2023

Who is likely to be affected

These measures could affect VAT-registered businesses who incur late payment interest, receive late payment penalties or are entitled to repayment interest on their VAT.

General description of the measure

The measures will make the following minor, technical changes to the new harmonised interest rules and late payment penalties for VAT, which took effect from 1 January 2023:

• when HMRC makes an assessment to recover money, because HMRC has made a payment or repayment to a taxpayer which is too high, late payment interest will be charged from the date HMRC made the original payment. Currently, the interest is charged 30 days after the date of the assessment.
• for customers who use the VAT Annual Accounting Scheme, late payment interest and late payment penalties will not be charged on instalments that are paid late. Late payment interest and late payment penalties will still apply to any balancing payment that is not paid on time.
• an uncommenced repayment interest provision, which is no longer needed, will be removed.

Policy objective

At Spring Budget 2021, the government announced a new penalty regime for VAT and Income Tax Self Assessment, and for VAT, changes to the rules on interest.

Historically, accrual of interest has been inconsistent across major taxes.

The VAT interest reform introduces a common approach across VAT and Income Tax Self Assessment. This provides greater consistency, fairness and certainty in the system, making it easier for taxpayers to understand how much interest has accrued on a payment or repayment.

The objective of these measures is to correct areas where the new interest legislation does not give the policy result intended under the reform.

Background to the measure

The new harmonised interest rules for VAT commenced on 1 January 2023, as enacted by:

• The Finance Act 2009, Finance (No. 3) Act 2010 and Finance Act 2021 (Value Added Tax) (Interest) (Appointed Days) Regulations 2022
• The Finance Act 2009, Sections 101 and 102 (Value Added Tax) (Late Payment Interest and Repayment Interest) (Exceptions and Consequential Amendments) Order 2022

These interest rules were developed through two consultations. The first, Making Tax Digital: Tax Administration, ran from August to November 2016. As well as proposing models for a late submission and late payment penalties, this consultation sought comments on alignment of HMRC’s interest rules.

The second consultation, Making Tax Digital: interest harmonisation and sanctions for late payment, ran from December 2017 to March 2018. This consultation focused on aligning interest for monies owed to and by HMRC, as well as proposing another model for the late payment penalty.

In implementing these changes, we have identified some minor defects in the legislation, which these two measures put right.

Detailed proposal

Operative date

The measures will have effect:

• For the measure on late payment interest from 15 March 2023.
• For the measure on late payment penalties from 1 January 2023.
• For the measure on repayment interest from the date of Royal Assent of Spring Finance Bill 2023.

The measures will only be relevant to an amount of VAT if it is subject to the Finance Act 2009 interest rules or new late payment penalties under Schedule 26 to Finance Act 2021. In general, these correspond to amounts of VAT payable for prescribed accounting periods starting on or after 1 January 2023.

Current law

Current law is contained in section 101 and Schedule 53 (interest on amounts payable to HMRC) and section 102 and Schedule 54 (interest on amounts payable by HMRC) to Finance Act 2009. These Schedules were amended by the Finance Act 2021.

These measures will not affect amounts of VAT subject to the previous interest rules (contained in the Value Added Tax Act 1994), which apply to VAT corresponding to accounting periods starting before 1 January 2023.

Proposed revisions

The proposed legislation inserts a paragraph into Schedule 53 to Finance Act 2009. The inserted paragraph prescribes the late payment interest start date for amounts of VAT recoverable from a person by virtue of sections 73(9) and 80C(1) of the Value Added Tax Act 1994. The result is that the late payment interest start date is the date on which HMRC paid the amount of VAT.

The legislation also prevents late payment interest applying to Annual Accounting Scheme instalments due under Regulation 50(2)(a) of the Value Added Tax Regulations 1995. The result is that late payment interest will only apply to a balancing payment (which encompasses any unpaid instalments) due under this scheme.

The legislation also amends Schedule 26 to Finance Act 2021 so that the legislation in respect of late payment penalties for Annual Accounting Scheme payments operates in the same way as the late payment interest.

The legislation also amends Schedule 54 to Finance Act 2009, which details the period for which repayment interest accrues. It removes cross-references to paragraph 4(1) Schedule 11 of VATA 1994 which prevented the accrual of repayment interest when a taxpayer had failed to comply with a requirement to provide evidence under that paragraph. The provision did not take effect when the new interest rules for VAT were commenced (by secondary legislation).

Summary of impacts

Exchequer impact (£m)

2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
Nil	Nil	Nil	Nil	Nil	Nil

This measure is not expected to have an Exchequer Impact.

Economic impact

These measures are not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

These measures are not expected to have an impact on individuals, households or families beyond those already identified for the wider reform, as set out in the original Tax Information and Impact Note: Interest harmonisation and penalties for late payment and late submission - GOV.UK (www.gov.uk).

The technical changes in these measures restore the original policy intent.

Equalities impacts

It is not expected that there will be adverse effects on any group sharing protected characteristics.

Impact on business including civil society organisations

These measures are not expected to have an impact on business or civil society organisations beyond those already identified for the wider reform, as set out in the original Tax Information and Impact Note: Interest harmonisation and penalties for late payment and late submission - GOV.UK (www.gov.uk).

The technical changes in these measures restore the original policy intent.

Operational impact (£m) (HMRC or other)

These measures are not expected to have an operational impact on HMRC beyond those already identified for the wider reform, as set out in the original Tax Information and Impact Note: Interest harmonisation and penalties for late payment and late submission - GOV.UK (www.gov.uk).

These measures restore the original policy intent.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be monitored through information collected from HMRC’s receipts.

Further advice

If you have any questions about the changes, please contact Shkulla Khpal on Telephone: 03000 548 215 or email: [email protected].