Businesses suffer £716m in HMRC interest in 2023

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% per year, and paying interest on overpayments at base rate minus 1%. Today, this means that late payments of corporation tax attract interest at a rate of 7.75% per year, but overpayments get credit interest at just 4.25% per year, leaving a 3.5% margin that HMRC pockets.

In a Freedom of Information request, RSM has found that interest charged on late corporation tax in 2023 was £716m, up from £259m, £330m and £298m in 2020, 2021 and 2022 respectively. This almost tripling of such interest receipts 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 quarterly instalments, which means that companies must estimate their tax for the whole year, initially when they’re only halfway through it – and for very large companies, initially when they’re only two months into it. Note that annual interest rates on such quarterly payments are slightly less punitive, at 6.25% for underpayments and 5% on overpayments.

RSM is seeing a number of clients generate unexpected profits, often late in the accounting period concerned, having made heavy losses during the coronavirus pandemic, and in some cases therefore becoming liable for quarterly payments before they even realise corporation tax will be due for that period.

Businesses with significant uncertainty over their profit levels therefore have a choice – estimate higher levels of profits than may ultimately be achieved and pay crucial working capital over to HMRC when it may not even be due (and receive interest at below base rate), or risk suffering interest at rates of up to 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 arguable whether it is genuinely reasonable for HMRC to make so much additional money from businesses struggling to pay their bills. 

With the Spring Budget almost entirely silent on corporation tax, and with the government 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.