Fair’s fair, except when it comes to HMRC’s interest?

The vast majority of us want to pay our taxes fairly because we recognise that the money raised goes to help pay for public services.  However, sometimes we make honest mistakes.  HMRC then charges us interest on the back-tax owed.  While we might not like it, most people understand why this happens. 

For example, according to the government’s website, when you make a mistake with a VAT return, HMRC will charge you 2.6% interest. However, if HMRC makes a mistake, then, as the government website tells us (without a blush of shame), you can only claim 0.5% interest.  This is normally paid for the whole period from when the VAT was overpaid or reclaimed until the date repayment is authorised.

Similarly, after the Bank of England increased central rates from 0.25% to 0.5% earlier this month, HMRC then raised the rate at which interest builds on all other tax debts (i.e. those apart from VAT), from 2.75% to 3%.  Needless to say, the rate paid by HMRC when it refunds miscalculated and overpaid tax remains at… 0.5%. This has not risen since 2009. To most of HMRC’s ‘customers’ this seems blatantly unfair. 

However, the counter argument (i.e. the one HMRC uses), is that interest on late payments has always been set at 2.5 percentage points above the Bank Rate. They also say that the rate on refunds will never fall lower than a floor of 0.5%.  As reported in the accountancy press, a spokesman for HMRC said: “The interest we charge and pay delivers fairness for all. It ensures we do not encourage people to overpay their tax to secure a higher interest rate than is available commercially and those paying their tax late do not get an unfair financial advantage over those paying on time.”

To which our answer is, “yes, we understand that it’s important that people don’t overpay in order to secure a higher interest rate than they can get commercially, but why does it have to be so much higher than the bank rate….?”  What do you think – is this fair?  Answers, on a postcard…