How does HMRC charge interest on late payments?

Here is a comprehensive answer on how HMRC charges interest on late payments.

How HMRC Charges Interest on Late Payments

What the law says

The primary statutory basis for late payment interest is Section 101 of the Finance Act 2009 (FA 2009), which provides that amounts due to HMRC carry interest at the late payment interest rate from the late payment interest start date until the date of payment.

• For most late payments, the late payment interest start date is the due date for payment of the amount concerned, even if that date falls on a non-business day.
• The late payment interest end date is the day on which payment is made. A credit or overpayment set off against an amount due is treated as a payment on the date the set-off takes effect.
• For Corporation Tax (CT), late payment interest is charged under Section 87A TMA 1970 from the normal due date to the effective date of payment (EDP).
• For CT quarterly instalment payments, debit interest is charged under Section 87A TMA 1970 (as extended by Regulation 7 of the Corporation Tax (Instalment Payments) Regulations 1988, SI 1988 No. 3172) from the instalment due date to the EDP, or to the normal due date if that is earlier.
• The interest rate is set by regulations under Section 103 FA 2009 (from 31 October 2011 onwards).
• Section 101 FA 2009 came into force for self-assessment amounts on 31 October 2011.
• VAT Annual Accounting Scheme instalments are explicitly excluded from Section 101 FA 2009 — interest is only charged on any amount remaining unpaid after the due date of the balancing payment.

HMRC guidance / practice

1. What interest is charged on: HMRC charges late payment interest on amounts which remain unpaid after the due and payable date, including income tax payments on account (s.59A TMA 1970) and VAT payments on account (s.28 VATA 1994).

2. Interest is not charged on penalties or interest itself.

3. Due dates are non-interest-bearing: The normal due date and each instalment due date are non-interest-bearing dates, so late payment interest begins to accrue from the following day.

4. Payment timing: A payment is not deemed made until midnight of the day it is posted, meaning late payment interest is calculated to that date inclusive.

5. Counting days: Days are counted from the late payment interest start date to the end date. For example, tax due on 31 January 2023 and paid on 1 February 2023 attracts 1 day of late payment interest.

6. Partial payments / instalments: Late payment interest continues to be charged on the reduced outstanding balance when amounts are not paid in full, including under a time to pay agreement.

7. Interest continues during recovery: Late payment interest continues to accrue throughout recovery proceedings.

8. Factors that do NOT affect the interest charge: The following have no effect on the normal due date or instalment due dates, and therefore do not reduce or suspend interest: late or non-delivery of a notice to file, whether a return has been submitted, the date a self-assessment was raised, the date of a revenue determination or assessment, any appeal against an assessment, or the time taken by HMRC to deal with enquiries. Additionally, any reason given by the taxpayer for late payment does not affect the interest charge.

9. No right of appeal: Section 101 FA 2009 provides that interest "shall carry" — there is no discretion for the First-tier Tribunal to determine that interest should not be payable, and no right of appeal against a charge to interest under the section.

10. VAT error corrections: Where a VAT return was inaccurate, late payment interest runs from the date the original return was due (not the date of the error correction or assessment).