Rising interest rates make late tax payments more costly

Rising interest rates are a challenge for businesses at any point. However, as Tax specialist Duncan McKellar explains they are a major issue for companies that have developed a habit of making late tax payments.

Increasing interest rates push up the cost of late tax payments

Generally, HM Revenue & Customs (HMRC) do not charge penalties on late payments of corporation tax. Instead, an interest charge is applied from the normal due date until the date of payment. HMRC’s late payment interest rate is linked to the Bank of England base rate and therefore had been set at a relatively low 2.6% since April 2020 until it began to rise in January 2022.

Steady increases last year mean that the late payment rate has now more than doubled to 6% as of 6 January 2023. The potential increased cost for late payers strengthens the importance of having a good compliance system in place and establishing tax liabilities early.

Consilium Chartered Accountants work with our clients to provide early notice of tax payments and avoid pinch points in cash flow. You can learn more about our Tax compliance services.

Late tax payments: a little bit of good news…

There is some good news amongst the bad. Firstly, interest charges are tax deductible for corporation tax purposes.

Secondly, there is a lower rate of 4.5% applicable where a company pays tax in instalments by virtue of being in the ‘large’ or ‘very large’ company instalment payment regime. This rate applies to late or underpaid instalments until the normal ‘nine-month’ due date for tax when the rate switches to the main rate of 6%.

What happens if my company has overpaid tax to HMRC?

Companies that have overpaid tax are rewarded with credit interest. In this instance, the interest applies from the normal due date for payment of tax until the overpayment is repaid. Again, this repayment interest rate tracks the Bank of England base rate and has therefore risen from 0.5% in July 2022, to 2.5% as of 6 January 2023. Credit interest may be applied to repayments arising due to such things as research and development tax credit claims or use of tax losses.

Companies that overpay tax due in instalments or make an early payment of corporation not due in instalments are entitled to credit interest at 3.25% until the normal due date for payment.

Where a company overpays in an accounting period or is due a repayment, Consilium can speak to HMRC and request that any overpayment is transferred to another period to cover any shortfall and minimise potential interest charges.

Do you need help with Tax compliance?

Consilium Chartered Accountants support and advise a diverse range of businesses with Tax compliance services. If you are concerned about Tax compliance or would like to talk to a tax specialist about your business, please contact Duncan McKellar to arrange a free virtual or in-person meeting.

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