Businesses Suffer £716m In HMRC Interest In 2023

Interest on corporate tax paid to HMRC has almost tripled in three years – Flora Barnes a director at audit, tax and consulting firm RSMUK asks, why is this, and has it gone too far?

Most businesses know that HMRC charges interest on late payment of corporation tax. But those businesses are not always aware that HMRC can effectively make money on the interest rates they set, by charging rates of base rate plus 2.5%, and paying interest on overpayments at base rate minus 1%. Today, this means that late payments of corporation tax attract interest of 7.75%, but overpayments get credit interest of just 4.25%, leaving a 3.5% margin that HMRC pockets.

In a Freedom of Information request, RSM has found that corporation tax interest charged in 2023 was £716m, up from £259m, £330m and £298m in 2020, 2021 and 2022 respectively. This almost tripling of interest paid between 2020 and 2023 is likely not only due to the increase in Bank of England base rates, which crept up through 2022 and 2023, but also due to the increased 25% main corporation tax rate brought in from 1 April 2023.

Another factor may be that, due to changes introduced for periods beginning on or after 1 April 2023, more and more companies are falling within the requirement to pay corporation tax by instalments, which means that companies must estimate their tax for the whole year when they’re halfway through it – and for very large companies, when they’re only two months into it. (Note that interest rates on quarterly payments are slightly less punitive, at 6.25% underpayment and 5% overpayment.)

RSM is seeing a number of clients unexpectedly return to profitability, having made heavy losses during the pandemic, and therefore becoming liable for quarterly payments before they even realise corporation tax will be due for that year.

Businesses therefore have a choice – pay crucial working capital over to HMRC when it may not even be due (and receive interest at below base rate) or risk suffering 7.75% on underpayments.

HMRC says that ‘the difference between rates is in line with the policy of tax authorities worldwide’, and ‘compares favourably with commercial practice’, but it remains to be seen whether it is genuinely reasonable for HMRC to make so much money from businesses struggling to pay their bills.

With the Spring Budget almost entirely silent on corporation tax, and with HMRC happy to make hundreds of millions from late paid corporation tax, businesses are receiving a clear message that they are not the priority this election year.