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CIOT calls on government to rewrite unfair VAT rules

January 13 2025

The Chartered Institute of Taxation (CIOT) is calling on the government to address unfair tax rules as interest rates on late payments rise.

The CIOT is urging the government to reintroduce rules which enable HMRC to waive interest on underpaid VAT when no actual tax loss to the Exchequer occurs.

This power was omitted from the new VAT interest regime which came into effect for VAT return periods starting on or after 1 January 2023.

The exposure to interest where there is no tax loss is due to the unique operation of the VAT regime.

The interest rate on late payment of tax is due to increase by a further 1.5% in April, with no equivalent increase in interest on overpaid tax.

Richard Wild, CIOT's Head of Tax Technical, said: 'It is possible for a taxpayer to under-declare an amount of VAT due to HMRC, in circumstances where that VAT is reclaimable by a third party, such as the taxpayer's customer.

'Under the previous interest regime the principle of commercial restitution could be applied, providing HMRC with discretion not to charge interest in these circumstances, because there had been no loss to the Exchequer.

'Under the present system, HMRC no longer has statutory discretion to not charge interest in these circumstances. So, interest is now being charged in situations where there is no net loss of tax.

'We do not understand this to be a deliberate decision on the previous government's part, but it is vital that this unfairness is removed and commercial restitution reinstated.'

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