LITRG, CIOT, WTT Group and IPSE object to an incoming 9% charge on tax debts.
Experts say HMRC has gone a bit far in ‘making clear it’s not a bank’ by hiking its interest rate on unpaid tax to a “punitive” level.
At Autumn Budget 2024, the government said late payment interest charged by HMRC on tax debts would “increase” by 1.5% points.
Based on the current BoE base rate (5%), the increase means HMRC will charge 9% on unpaid liabilities, when it bites from April 6th 2025.
‘Fairly’
HMRC sets how much it levies on unpaid tax by taking the base rate and adding 2.5%, but April’s 1.5% increase makes that addition 4%.
Repayment interest isn’t changing, though, so owed-taxpayers won’t see any uplift in the current formula — base rate minus 1%, with a lower limit of 0.5%.
The Revenue claims this repayment interest model compensates taxpayers “fairly,” when they overpay, for loss of use of their money.
‘Commercial restitution’
But the much lower rate when HMRC owes the taxpayer, compared to when the taxpayer owes HMRC, isn’t fair to IPSE.
Andy Chamberlain of The Association of Independent Professionals and the Self-Employed (IPSE), finds it so unfair that he met with HMRC to broach it immediately after Wednesday’s budget.
However, according to an ex-tax official, HMRC regards the late payment interest rate as “commercial restitution” for not having taxpayer money to use.
“On the other hand, repayment interest is set at minus 1%, with a 0.5% floor,” the former tax official, Tom Wallace told ITContracting.com.
“The argument [from the tax authority to justify this much lower rate when it owes taxpayers] is that HMRC isn’t a bank.”
‘HMRC do not consider themselves a bank’
This is the exact message the budget sends by hiking HMRC late payment interest but leaving repayment interest as it is, says the CIOT.
“These measures make…clear that HMRC do not consider themselves a bank,” says the Chartered Institute of Taxation’s Ellen Milner.
“[The Revenue is] ramping up their collection efforts and increasing the cost of owing the money in the meantime.”
‘Playing field further sloped in HMRC’s favour’
A director at the CIOT, Milner sounds as if she knows why IPSE met with HMRC as soon as it cued up a 9% late payment interest rate.
“We recognise the government’s intentions to minimise the tax liabilities owed to it.
“[But] the playing field has been further sloped in HMRC’s favour, as no equivalent rate increase is being made to money owed by HMRC,” she says.
Director of tax investigations at WTT Group, Mr Wallace reflected:
“The proposal to raise interest rates on late payment to 4% above the base rate removes any doubt that the rate is set punitively to encourage prompt payment.”
‘Cheap lender’
Kate Garcia, a tax partner at Shoosmiths, also used the ‘p-word’ to describe HMRC’s 2.5% increase in its late payment interest rate.
“It’s fair to argue that the change may have been driven by the few businesses using HMRC as a cheap lender,” began Garcia, responding to claims that some firms pay corporation tax late because HMRC’s current rate of interest (7.5%) is less than the cost of a borrowing from a bank.
“My view, though, is that it would be better for the government to levy higher [HMRC] penalties for late payment, to stop that kind of behaviour.
“That would be preferable to raising interest rates [punitively like it will do from April], given that interest applies to all taxpayers, regardless of the circumstances leading to the late payment.”
‘Increasing the interest rate on tax owed heaps pressure on taxpayers’
IPSE says its concern is for taxpayers who receive wrong or overzealous assessments from HMRC, as they may hastily accept them to avoid surcharges starting at 9%.
The association’s Mr Chamberlain told ITContracting.com: “Increasing the interest rate on tax owed will heap the pressure on taxpayers to quickly accept HMRC’s determinations, even if there are strong arguments to say the tax isn’t owed at all.”
“Taxpayers are essentially going to be punished for challenging tax demands that may turn out to be incorrect.”
‘Equitable remedy to some, punitive to the rest’
Contractors on the receiving end of determinations under the IR35 and MSC frameworks are among those who Chamberlain is most fearful for.
And tax dispute expert Mr Wallace confirmed that such atypical taxpayers do stand to be hardest hit, potentially at times of extreme distress.
WTT Group’s tax investigations director explained last night: “For the majority of the public that pay their tax through PAYE, this [2.5% increase in HMRC interest] may seem an equitable remedy to late payment, given their tax is deducted at source.
“However, it takes little account of those who unwittingly get into disputes with HMRC; have unforeseen cashflow emergencies in their business, or suffer other financial hardship, such as bereavement, unexpectedly.
“Many of those taxpayers will genuinely want to pay but just need time to re-arrange their financial affairs to get back their equilibrium.
“Such a punitive rate only exasperates, perhaps irreparably, their position. And it will do little to change the behaviour of those who will deliberately default whatever the rate in force.”
‘Substantial remedy’
Adam Home, managing director of Safe Collections, is familiar with late payment interest rates being steeply set to influence behaviour, albeit in a commercial setting.
The debt recovery expert told ITContracting.com: “Companies [are free to] negotiate their own higher or lower terms and we often see [BTB] contracts with varying rates of interest for late payment.
“Many of these [are] for lower amounts than the statutory amount.
“But we would argue anything less than the statutory 8% above BoE base is not a substantial remedy.”
‘Any-figure late payment interest clauses ’
Put another way, companies can include late payment interest clauses “of any figure,” he said, provided it represents a substantial remedy to late payment.
“That said, our standard advice is to simply refer to your statutory right to charge late payment costs plus interest”, Home added, addressing contractor limited companies.
“Legislation permits PSC directors, for example, the ability to recover both the fixed costs and any ‘reasonable costs’ incurred trying to collect the debt.”
‘Unfair’
As to whether the taxman is being ‘reasonable’, by tabling what equates to a 60% increase in chargeable late payment interest, Meredith McCammond, of LITRG isn’t so sure.
“This [2.5% points increase] seems particularly unfair when you consider the differential between the rate of interest charged by HMRC on late payments, as compared to the interest it pays on overpayments or refunds,” McCammond says.
“It’s also hard to see how this aligns with HMRC’s aim of being a trusted, modern tax administration system – one that maintains taxpayers’ consent through fair treatment.”
‘Heed the warnings’
The Low Incomes Tax Reform Group’s technical tax officer, McCammond continued to ITContracting.com: “It’s therefore more important than ever that people heed the information, examples, warnings and tips in our guide to late payment interest.”
Alongside the recruitment of 1,800 new debt management staff, HMRC increasing the rate of interest on unpaid tax from April 6th 2025 is projected to raise £8.5billion between now and 2029-30.
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