A Ratings Disaster

/ Business and Economy, Government, Tax

Author: Henry Ejdelbaum

Tags: interest rates, Tax

Interest rates are already complicated, but HMRC seems determined to make them even more so. Reacting to the Bank of England’s base interest rate increase, HMRC increased the interest rate it charges on late tax payments. However, there has been no corresponding increase in the rate it pays out if you overpay tax. So, you end up paying more, but not getting more back, when you already have a 2% difference between the two!

In the case of a normal financial institution, this might make sense – why would they not want to maximise the interest they charge without increasing the interest they pay? However, HMRC’s interest rates are set by the Government, which unfortunately mean that an increase in repayment rates is unlikely to happen soon.

The formula for interest on late paid tax (which applies to almost all taxes) is bank base rate plus 2.5%. Since there’s been a 0.25% increase, the interest rate has risen to 3.25%. However, the formula for repayment interest is bank base rate minus 1.0%, with a minimum of 0.5%. Since the base rate has been below 1.0% for nearly ten years, the minimum repayment rate has continued to apply – we won’t see any change in this rate for quite some time, unfortunately!

With the current economic climate, it would require a major shift in attitude for the base rate to move enough to make a difference to the repayment rate, so it looks like we’ll have to live with a larger-than-hoped-for difference between the two rates for a while longer!

In the meantime, if you have any worries or queries about how the rise in base rate might affect your business, contact your local AIMS Accountant for advice!