Interest on Late VAT Payments

If you pay your VAT late, HMRC will charge you interest on the outstanding amount from the day after the payment deadline until you pay in full. The interest rate is set at the Bank of England base rate plus 4%, and it applies to late VAT payments, penalties, and certain asses...

Introduction

When HMRC charges interest on late VAT payments

For VAT accounting periods starting on or after 1 January 2023, HMRC charges late payment interest from the first day your payment is overdue until the day you pay it in full.

Interest applies to:

VAT shown on your VAT return
Amendments or corrections to a return
VAT assessments made by HMRC
Missed VAT payments on account (advance payments some businesses must make)
Overdue penalties themselves, including late payment penalties and late submission penalties

If you arrange to pay VAT in instalments through a Time to Pay arrangement, HMRC continues to charge interest on the outstanding balance until you've paid the full amount.

How late payment interest is calculated

Late payment interest is calculated using a simple (not compound) rate. The rate is the Bank of England base rate plus 4%.

Interest runs from the first day after your payment deadline until the day you pay in full, including the day of payment.

Worked example

Let's say you're VAT-registered and submit quarterly returns. For the period 1 January 2025 to 31 March 2025, you must submit your return and pay any VAT due by 7 May 2025.

You submit your return on time showing £8,340 VAT owed, but you don't make the payment until 14 May 2025 — seven days late.

If the Bank of England base rate is 4.5%, the late payment interest rate would be 8.5% (4.5% + 4%).

Your interest charge would be:

£8,340 × 8.5% × 7 days ÷ 365 days = £13.60

Interest on overdue assessments and corrections

For VAT accounting periods starting on or before 31 December 2022, different rules applied. Under those rules, HMRC charged "default interest" where you:

Underdeclared or overclaimed VAT on your VAT returns
Submitted an error correction (previously called a voluntary disclosure)
Accepted a central assessment that was later found to be too low

This default interest was calculated from the date the VAT first became due up to the calculation date on your notice of assessment. However, interest was limited to a maximum of three years before the calculation date, even if the VAT had been outstanding for longer.

Default interest was only charged where it represented "commercial restitution" — meaning compensation for HMRC's loss of use of the money. For example, HMRC wouldn't charge interest if you underdeclared VAT that would have been immediately reclaimable as input tax by another party.

Interest you cannot be charged on

HMRC does not charge interest on:

VAT that you declared on your return but haven't yet paid (for periods starting before 1 January 2023)
Assessments raised purely because you failed to submit a VAT return
Existing penalties or interest charges themselves (though this changed for periods from 1 January 2023)
Amendments made to returns before HMRC fully processes them

Net VAT errors below the threshold set out in Notice 700/45 can be corrected on your next VAT return without incurring interest charges.

Checking your interest charges

You can view late payment interest charges in your VAT online account. Sign in to see how the interest has been calculated and what you owe.

If HMRC charges you interest, they'll typically send you:

A notice of assessment showing the VAT and interest due
A notification of errors form (if you submitted an error correction)
A statement of account showing your current balance

What happens if you don't pay interest within 30 days

If you don't pay all the VAT and interest within 30 days of receiving your notification, HMRC will charge further interest. This additional interest continues to accrue monthly until you've paid everything you owe. HMRC will normally send you a "Notice of Assessment of Further Interest" to tell you about these additional charges.

If you pay by cheque, remember that it takes three bank working days (excluding Saturdays, Sundays, and bank holidays) for the payment to clear into HMRC's bank account. You'll need to allow for this clearing time to avoid further interest charges.

If you cannot pay on time

If you know you won't be able to pay your VAT bill by the deadline, or you've already missed a payment, contact HMRC as soon as possible. Call the Payment Support Service to discuss your options — you may be able to arrange a payment plan, though interest will continue to accrue on the outstanding balance.

Interest you can receive from HMRC

The rules work both ways. If HMRC owes you money — for example, if they've made an error in your favour or held onto a repayment for too long — you may be entitled to receive interest from them. This is sometimes called "repayment interest."

Objecting to interest charges

You cannot appeal against a late payment interest charge in the same way you can appeal other HMRC decisions. There is no right to ask for a review or take the matter to an independent tax tribunal.

However, you can object to the amount of interest charged if:

HMRC made a mistake or caused unreasonable delay that contributed to the interest building up
You dispute the relevant date or effective date of payment
You're questioning the legislation itself

HMRC can only accept an interest objection after you've fully paid the tax that the interest relates to. If you need to discuss this, contact the VAT general enquiries helpline.

You cannot deduct VAT interest from your profits

The interest rate HMRC charges is set to reflect the fact that you cannot deduct this interest from your net profit when calculating your Corporation Tax or Income Tax liability. This is different from commercial interest, which may be tax-deductible.

Sources

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.