The current interest rules were introduced by Finance Act 2009, and although they do not apply to all taxes, it currently applies to among others, corporation tax, income tax, capital gains tax and the ATED. Generally, the purpose of the interest is to compensate for the loss of use of money over time and is not a penalty. The rates for late interest payments and interest compensation for the overpayment of tax is set by the Treasury, and is calculated using a simple rather than compounding method.
Repayment interest runs from the repayment interest start date until the date on which HMRC makes payment. The ‘repayment interest start date’ depends on whether the amount was originally paid to HMRC or whether it arose because of a return or claim. The repayment end date is the date when the amount is repaid to the person, paid to another person or set off against that or the other person’s liability. HMRC makes repayment interest to the end date, which includes the date when repayment is made. Rates for repayment interest are based on the Bank of England official rate and are published on the internet.