'Worrying' HMRC tax warning as some people will have to pay more

People are being warned that HM Revenue and Customs (HMRC) is set to net an extra £200 million each year as interest rates on late payments are hiked up, according to accountants Price Bailey. As announced in this week's Budget from Chancellor Rachel Reeves, the amount of interest charged on unpaid tax liabilities will increase by 1.5 percentage points to the bank rate plus 4 percentage points.

Currently, late payment interest is charged at the bank rate plus 2.5 percentage points. This new change will come into effect on April 6, 2025.

Price Bailey highlights that the interest HMRC pays on money it owes to taxpayers will stay the same at the bank rate minus one percentage point, with a lower limit of half a percentage point. f the bank rate remains unchanged between now and the April start date, the late payment interest rate would be 9 percentage points compared to a repayment interest rate of 4 percentage points, as reported by Birmingham Live.

In the year to October 2023, HMRC earned a record £346 million in interest from taxpayers who paid late or arranged a Time to Pay payment plan, more than double the £159 million it made the previous year. Price Bailey says that assuming interest rates and the amounts owed by taxpayers remain unchanged, HMRC will rake in over half a billion pounds in late interest payments by the 2025/26 tax year.

Andrew Park, tax investigations partner at Price Bailey, said: "The interest rates being charged on late tax are now a form of double punishment. Taxpayers are already charged statutory late payment penalties, late filing penalties and heavy penalties for underpaid tax.

"This is a worrying shift from charging enough to deny taxpayers an advantage in paying late to creating another punishment by the backdoor. It's a blatant cash grab by the taxman and one which comes without any safeguards. Existing penalties come with legal protections and can be appealed or mitigated, late payment interest cannot. HMRC has long claimed that the interest rates on tax owed and overpaid are fair, but this is now manifestly untrue.

"Most individuals and businesses pay tax late because they are experiencing financial distress and are simply unable to pay. It's not a question of them needing an incentive to pay tax on time. If punitive interest rates discourage late payment, one would expect the amount HMRC rakes in from late payments to fall but instead they are forecasting a windfall."

He added: "If businesses or individuals go bust, tax debts can be written off entirely. HMRC is walking a fine line between, on the one hand, allowing distressed taxpayers extra time to pay and, on the other, squeezing more money out of those already experiencing financial difficulties."

Price Bailey says the hike in interest charged for late payment of tax comes at a time when HMRC has been criticised for persistent delays with its customer helplines. It was widely reported that the day before the tax return deadline (January 30, 2024), callers to HMRC's self-assessment helpline were frequently waiting longer than 40 minutes before getting through to an adviser.

The number of penalties issued by HMRC for late payment of tax or late filing of tax returns cancelled on appeal jumped by70 per cent in 2023/24. There were 35,876 penalties cancelled on appeal in 2023/24, compared with 2022/23 when 21,071 were overturned.

Missing the self-assessment deadline leads to an automatic £100 late filing penalty, with additional penalties for paying outstanding taxes after the deadline. However, increasing numbers of taxpayers were found to have a reasonable excuse.

Mr Park said: "It is important that the tax system is seen as fair and even-handed. Moreover, it is a requirement of the HMRC Charter. The widening gap between late payment and repayment interest undermines the principle of fairness. When late filing and payment of tax is due to HMRC's own bureaucratic shortcomings, taxpayers feel doubly aggrieved."