Tax authority under fire for discrepancy between interest charged on late tax payments and offered on rebates
HMRC has been accused by a leading industry expert of profiteering on late self-assessment taxes at the expense of the self-employed.
The tax body raised the rate of interest it charges on late tax payments in May this year to 7% – effectively allowing HMRC to collect more tax revenue than it is owed.
In addition, the body only pays 3.5% interest on tax refunds, with the 100% difference pocketed by HMRC.
The interest rate applies to late payments for a range of taxes, including income tax, National Insurance contributions and Capital Gains.
Sharp increase in interest rates in recent years
In recent years, the percentages charged on late payments have risen sharply, from 2.6% in April 2020. At the same time, interest on rebates was paid at 0.5%.
Since then, however, rates have climbed – slowly at first, to 2.75% in January 2022, then rapidly to 5.5% in November 2022, breaching 6% at the start of 2023.
That growth has continued, with subsequent increases in February (by 50 basis points, or 0.5%, to 6.5%) and April (to 6.75%), and again in May to its current level of 7%.
While the tax authority has increased the repayment percentage proportionally – that is, by the same number of basis points with each rise – the repayment rate remains half that of the interest rate.
Late submissions higher than forecast
HMRC estimated around 12m self-assessment returns would be made by self-employed workers across the country by the 31st January deadline.
The forecast also included estimates for the number of late submissions. While this was set at around 600,000, an HMRC press release suggests that closer to 700,000 failed to submit their tax returns on time. As a result, they will incur fines and late payment penalties.
With such a high number of late submissions this year, HMRC stands to make significant additional revenue as a result of the interest it charges.
Julia Kermode is the founder of IWORK, an independent body championing the UK’s independent workforce, and has accused HMRC of acting “unbelievably” unfairly over its interest charges.
Accusing HMRC of “profiteering from self-employed workers at the worst possible time”, Kermode pointed out that the cost of living crisis is putting self-employed workers under extreme financial pressure.
HMRC’s interest charges are adding to this, Kermode said, “inflicting financial pain on small business owners” in a move which is “reckless, short-sighted and counterproductive”.
“Rather than doing everything to help independent workers cope with soaring mortgage payments and the rising cost of living, these underhand tactics do the total opposite”, she added.
“Hundreds of thousands of people are being hit with needlessly high interest on late payments. All the while, HMRC gives itself an easy ride, paying half of the amount of interest that it charges”, Kermode said.
Kermode also called for greater support for the UK’s independent workforce, suggesting that “the government talk a good game, but action speaks louder than words”.