HMRC harmonises interest rates and sets a minimum rate of 0.5% interest on overpaid tax

This year's Finance Act contained changes to the way in which HM Revenue & Customs (HMRC) calculates interest on late paid and overpaid tax. What changes have been made and when will they come into force?

Why have changes been made?
Prior to the legislation in Finance Act 2009 coming into force there have been a number of different ways in which HMRC calculates interest on late paid and overpaid tax. This means not only a difference in the rates of interest applying for different taxes but also a variety of ways in which the interest is calculated (such as different start and end dates for interest periods). The Government therefore decided to harmonise the way in which interest is calculated across the board on all taxes and announced this in the Budget during April 2009 following a period of consultation.

What changes have been made?
Formulae have been introduced for calculating interest on late paid and overpaid tax to apply for all taxes and duties, except for corporation tax and petroleum revenue tax (PRT). The Government intends to introduce similar legislation covering those taxes in next year's Finance Act.

Other than for corporation tax and PRT, the following rates of interest will apply to all taxes:

• for interest charged on late payments of tax: Bank of England base rate plus 2.5%
• for interest paid on overpayments: Bank of England base rate minus 1%.

HMRC has announced that there will be a new minimum rate of 0.5% for interest on overpayments of tax. This means that even when the Bank of England base rate is below 1.5%, HMRC will still pay interest on overpaid tax.

When will the changes take effect?
As the new rates are linked to the Bank of England base rate they will come into effect 13 days after the Monetary Policy Committee meeting at which any change to the base rate is announced. The next Monetary Policy Committee meeting is due to be held on 9-10 September 2009, and therefore the first rate change will follow that meeting. HMRC will publish the changes on its website. The new rates will then stay in force until a future change in the Bank of England base rate.

How do the changes compare to the current rates in force?
The current rate of interest in respect of overpaid income tax, National Insurance, capital gains tax, stamp duty, stamp duty reserve tax and inheritance tax is 0%, something that was reported in the Tax Story of the Week on 2 February 2009. Therefore once the minimum rate of 0.5% comes into force this will mean an increase to the rate of interest on overpaid tax.

However there will also be an increase in the rate of interest on late paid tax for most taxes, the most significant being the change to the rate of inheritance tax which is currently 0%. If the Bank of England keeps the base rate at 0.5% then this would increase by 3.0%. Other taxes such as income tax, National Insurance, capital gains tax and stamp duty land tax would suffer a smaller increase for late payment by 0.5% from 2.5% to 3.0%.

Francesca Lagerberg, Head of Tax at Grant Thornton says: "The minimum rate of interest on overpaid tax and the improved simplicity and clarity for taxpayers is a positive move. However the increase in the rates of interest on late paid tax for some taxes, such as the steep increase for inheritance tax is not good news, particularly as it might be difficult to sell assets to pay inheritance tax on time in the current climate. The message to taxpayers is clear: if you pay your tax on time then you will have nothing to worry about."

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