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Income Tax Self-assessment : Interest on Overdue Tax

10.5

The start date for income tax self-assessment payments is the due date for payment of each instalment of the tax. (see 8.1), ie 31 January is in the year of assessment in the case of the first interim payment, 31 July following the end of the year of assessment in the case of the second interim payment and the following 31 January for the balancing payment (including the whole of any capital gains tax). If the taxpayer gave notice of chargeability by 5 October following the end of the tax year but HMRC did not issue him with a tax return until after 31 October, the interest runs instead from three months after the date of issue of the return [TMA 1970, s 86(2)]. If no return is issued by 31 October because notice of chargeability was not given, the interest runs from the normal 31 January date.

10.6

If the taxpayer makes a claim under Taxes Management Act 1970 (TMA 1970), s 59A(3) or (4) to reduce his payments on account (see 8.4) and a balancing payment becomes payable, late payment interest is calculated on the interim payments as if each of those payments on account had been equal to the lower of:

  • (a) the aggregate of that payment on account and 50% of the balancing payment due; or
  • (b) the payment on account that would have been due had the claim to reduce not been made.

[FA 2009, Sch 53, para 1(1),(2)]. The effect is that interest is payable on the amount (if any) of the reduction that proves to have been excessive. In calculating interest on the balancing payment for this purpose it must be assumed that both of the payments on account (as reduced) have been made.

Focus

No account is to be taken of any amount that has been paid on account other than under TMA 1970, s 59A(2) (which is the provision that requires self-assessment payments on account to be made), but any amount payable in respect of capital gains (which do not attract an interim payment) is ignored [FA 2009, Sch 53, para 1(3)].

10.7

It is not clear why additional payments have to be ignored. Suppose, for example, a taxpayer is due to make interim payments of £10,000 each for 2013/14 (and has not claimed to reduce them), he makes both payments on the due date but also pays a further £5,000 on 12 December 2014. The tax ultimately payable is found to be £28,000 and the balance of £3,000 is paid on 18 February 2015. Logically, interest should be payable from 1 to 18 February 2015 on £3,000, not on £8,000. Undoubtedly, Parliament does not want HMRC to have to pay interest on the £5,000 from 12 December 2010 to 31 January 2011, but as s 86 deals only with interest on overdue tax there seems no reason why the section should seek to deal with amounts paid early.

10.8

If an additional amount of tax becomes payable as a result of an amendment or correction to a self-assessment, the late payment interest start date in respect of that amount is the date that would have applied had the original assessment or self-assessment been complete and accurate and made on the date (if any) by which it was required to be made [FA 2009, Sch 53, para 3(1),(2)]. If a person failed to give notice of chargeability, the original assessment is the self-assessment that would have been made had the taxpayer been required to file a tax return [FA 2009, Sch 53, para 3(3)]. If the original notice to make a tax return was withdrawn (see 2.11), but the taxpayer still had a duty to notify chargeability, interest runs from the due date that would have applied had a return been made in response to the original notice [FA 2009, Sch 53, para 3(3A) inserted by Finance Act 2013 (FA 2013), Sch 51, para 7]. The late interest start date for tax payable under an assessment or determination by HMRC in place of (or in addition to) a self-assessment, or an assessment by HMRC in lieu of one which should have been made by the taxpayer [FA 2009, Sch 53, para 3(1),(2)].

10.9

If the taxpayer makes a claim to reduce his interim payments (see 8.4) and further tax is due, either as a balancing payment when the return is issued, following an amendment or correction of the return or under a discovery assessment, interest is payable from the due date of each interim payment in relation to 50% of that extra tax, but limited to interest on the amount by which the interim payment was reduced [TMA 1970, s 86(4), (5)].

Example 10.1 – Interest: reduction in interim payments

Joe was due to make interim payments for 2016/17 of £20,000 each. He believed that his income had fallen significantly, and applied to reduce the interim payments to £13,000 each. He paid the first £13,000 on 8 February 2017 and the second on 20 September 2017. When he submitted his return this showed tax payable 2016/17 of £27,800. Joe paid the balance of £1,800 on 20 February 2018. HMRC enquired into Joe’s return. As a result of their enquiries the return was amended, the tax ultimately due being £46,000. The extra tax of £18,200 was paid on 19 December 2019.

Joe will have the following interest liabilities:

on

£13,000 paid 8/2/2017

from

1/2/2017 to 8/2/2017

on

£13,000 paid 20/9/2017

from

1/8/2017 to 20/9/2017

on

£1,800 paid 20/2/2018

on £900

from

1/2/2017 to 20/2/2018

on £900

from

1/8/2017 to 20/9/2018

on

£18,200 paid 19/12/2019

on £6,100 (ie £20,000 minus

£(13,000 + 900))

from

1/2/2016 to 19/12/2018

on £6,100

from

1/8/2016 to 19/12/2019

on £6,000

from

1/2/2018 to 19/12/2019

10.10

If a person’s self-assessment payments on account exceed the tax ultimately due for the year, so that there is an overpayment, late payment interest is payable only on the amount by which the payment on account exceeds 50% of the overpayment [FA 2009, Sch 53, para 2(1),(2)].

Example 10.2 – Interest: payments on account exceed tax due

Fred is due to make interim payments for 2018/19 of £15,000 each. He pays the first on 20 March 2018 and the second on 18 August 2018. Fred’s tax liability for 2018/19 turns out to be £26,000.

Fred’s interest payments will be:

on

£13,000

from

1 February 2018 to 20 March 2018

on

£13,000

from

1 July 2018 to 18 August 2018

The figure of £13,000 is the net figure. Fred is actually due to pay interest on the £15,000 with interest of £2,000 of that amount being remitted. It should be noted that interest is payable on £13,000 from 1 July 2016 to 18 August 2016 even though Fred paid £15,000 in March 2016; he is not given credit for the £2,000 excess when determining the interest due on the July payment.

10.11

Prior to 1 November 2011 the wording was different, but the effect was broadly the same. If tax was not paid by the due date, interest was payable from that due date [TMA 1970, s 86(1)]. The rate of interest was fixed by the Treasury by statutory instrument [FA 1989, s 178]. If the taxpayer made a claim to reduce his interim payments and further tax was due (either as a balancing payment when the return was submitted, following an amendment or correction of the return or under a discovery assessment) interest was payable from the due date of each interim payment in relation to 50% of that extra tax, but limited to interest on the amount by which the interim payment was reduced [TMA 1970, s 86(4),(5)]. If the tax ultimately found to be due (including as a result of any adjustment or discovery assessment) was less than the interim payments, and either or both of the interim payments was paid late, 50% of the interest applicable to each of the interim payments fell to be remitted [TMA 1970, s 86(8)]. Again, no account was to be taken of any payments on account otherwise than as statutory interim payments [TMA 1970, s 86(9)]. The main difference was that if any additional tax was paid within 30 days of the due date for the additional amount (normally the date it was assessed or the tax return amended) no interest charge arose.

By Robert Maas for Bloomsbury Professional