In the past, if it were found that UK personal tax payers had overpaid on income tax, stamp duty or national insurance then once a refund was processed accordingly, interest would be included in the final sum. This has now changed as a result of a rate cut enforced by the Bank of England.
Last month, the HMRC announced that from 27th January 2009, no interest would become due to those UK personal tax payers who had overpaid on income tax.
Previously, the rate of interest payable was 0.75% on such monies held.
Head of tax at Baker Tilly George Bull spoke out about the recent decision made by the HMRC: “HMRC has always encouraged people to pay their taxes by charging a relatively high rate of interest on unpaid tax. When it's the other way round, with HMRC owing money to individuals and businesses, the interest rate is always lower. It is called the "repayment supplement", but now there is no repayment and no incentive to ensure repayments are fast”
Overall, this decision has caused arguments because whilst the HMRC won’t pay out interest on monies held to UK personal tax payers, any individuals that owe money will still be charged a set rate of interest (currently 3.5%).
Rupert Shiers, a partner at law firm McGrigors said that the implementation of a 0% interest rate by the HMRC as a result of recent Bank of England cuts may possibly go against European law which indicates that a rate of interest offered to those who make overpayments, should be competitive.
Shiers said: "Taxpayers who owe HMRC money will not be able to take advantage of this 0% offer."
"European law states HMRC has to pay a commercial rate on tax that it has overcharged. You have to question whether 0% is really commercially competitive. Add in the impact of inflation and this starts to look unfair."
Comments made by Vince Cable, the spokesman for the Liberal Democrat Treasury mirrored those of Rupert Shiers. "Even with interest rates at an all-time low, the Treasury's decision to offer 0% interest on the money it owes in overpaid tax seems very unfair. Companies and individuals who have overpaid tax through no fault of their own are in danger of losing out on substantial sums of money."
Not just tax overpayments that won’t receive interest!
Recent changes do not only affect those who have overpaid on income tax but it will also hit those individuals in relation to stamp duty, national insurance or even VAT. With some form of additional payment once being made, it is said the alterations could severely diminish the finances of the elderly, teenagers and businesses alike.
How can overpayments occur?
There is one prime example of how an overpayment could be made to the HMRC and that involves students who signed a R85 form which allows them tax-free interest on savings. Regulations state that once a person reaches the age of 16, the R85 will expire automatically. Many are not aware of this and once the tax-free interest ceases, this will inadvertently lead to endless overpayments being made that could total vast sums and now with the HMRC saying that no interest will be due; comments are being made as to the fairness and legalities of such a plan.
Is there any good news?
Whilst this 0% interest rate is proving extremely unpopular, especially with the HMRC continuing to charge 3.5% in penalties for late payments, they have said that no negative interest will be charged. Comments released by the organisation said about the new interest rates (or lack of) which "Are the first announced since legislation was amended in December 2008 to allow us to more quickly change these rates following a movement in market rates".
It is understandable that movements within the market as a whole could have caused this entire situation but with many arguing that some form of interest must be paid, how long can the HMRC continue with such a plan?
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