Will HMRC’s 9% interest rate bully you into submission?

Buried in the raft of revenue-raising measures announced at Autumn Budget 2024 was one seemingly rather small change -- the rate of interest on tax paid late to HMRC is going up by 1.5 percentage points.

At first glance, this announcement at chapter 5.27 of the Autumn Budget may not seem too dramatic, writes Andy Chamberlain, policy director at the Association of Independent Professionals and the Self-Employed (IPSE).

Small increase, big concern

But it actually raises the rate to a whopping 9% (on current base rate assumptions). It’s not so much the rate itself that is a concern here.

The real concern is that by increasing the HMRC interest rate further, the government might be strong-arming taxpayers into accepting charges that they really should be disputing.

Base rate plus 4 per cent

From April 6th 2025, the late payment interest rate charged by HMRC will be the Bank of England base rate, plus 4 percentage points.

Assuming the base rate remains unchanged until then (and to avoid being over-sensationalist, we acknowledge the rate is expected to fall), it would push the overall interest rate that HMRC charges on unpaid tax liabilities up to 9%.

It’s currently 7.5%. It wasn’t that long ago that it was 2.6%. Because, yes, the BoE rate really was just 0.1% during the pandemic!

How HMRC late payment interest works, and stings

When you’ve got a tax debt, interest applies from when the tax should have been paid.

So, should HMRC decide you underpaid tax four years ago, the interest will accrue from then on, not when HMRC raised the inquiry or started their investigation.

If the taxpayer disputes the charge, it could take further years to resolve, and the total interest bill will be significant -- even more so now that it’s been hiked to almost double figures.

Undisputed tax debt will be harder to pay off

Of course, there are more straightforward instances where a taxpayer is simply late to pay their tax bill. They don’t dispute that they owe the tax, and they just don’t have the money to pay it right now.

In such an instance, they can arrange a repayment plan with HMRC.

But even here, the HMRC interest rate will apply -- and again, it will hurt that bit more now that the rate is going up. It may even prolong the duration of the tax debt.

Disputing dubious tax charges just got riskier

Here in the UK, we are cursed with a very complicated tax system.

Not only are there a lot of rules to be aware of, but it’s often the case that the rules themselves are difficult to understand and arguments can be made as to whether they apply or not.

In some circumstances, HMRC might determine that tax is owed, but closer inspection -- often by a court -- will reveal that, in fact, it isn’t. The problem is that tax disputes take a long time to settle, especially once the courts are involved. And all the while, that interest is accruing!

The longer the dispute, the greater the risk

Most people reading this will assume I’m thinking of IR35 (and certainly that example could be used here).

But we have another example which is currently live and an unfortunate group of IPSE members are suffering terribly because of it.

The Managed Service Company (MSC) rules barely register in the minds of most contractor businesses, and yet two years ago around 2,000 contractors were told by HMRC they were, in fact, MSCs and had been for the previous four years.

Would you have paid ‘just’ four years of HMRC interest?

Out of the blue, these contractor businesses were told by the Revenue that all their income should have been taxed as employment income. If they had paid there and then, ‘just’ the four years of interest would have been added to the bill.

But what if the businesses appealed this determination?

What if they aren’t MSCs? And, by the way, what on earth is an MSC?!

By daring to challenge the determination, the contractors risk a significant uplift to the HMRC bill by way of an interest charge.

An interest charge which just got even bigger!

We are defending contractors patiently awaiting their day in court

IPSE and our tax partners at Markel are helping our group of members with their appeals.

We are still waiting for the first tribunals to be scheduled. The best we can hope for now is that the tribunals for these contractors accused of being MSCs will take place within four years of the initial determinations.

The principles of natural justice would suggest that the courts will side with the taxpayers on this one, but the reality is it’s not clear what the outcome will be.

The Managed Service Company legislation is complex and there is very little case law to guide us. If the contractors win, we’ll be popping the champagne corks with them. If HMRC wins, it’s a life-changing tax bill -- plus interest -- for all concerned.

Autumn Budget’s chilling attempt to snuff out the fighters

But what would be truly awful; what would be even more depressing than fighting and losing, is not fighting at all when there are genuine arguments to be made.

And yet that is exactly what the imposition of a punitive interest rate incentivises. The message from on high is:

‘You owe this tax and if you dare to disagree you will pay more.’

It wouldn’t be so egregious if it weren’t for the fact that tax is very complicated and there often really is a decent chance the tax isn’t owed at all.

The future (where we won't flinch)

Our organisation will continue to defend our members in tax disputes and we hope they won’t be bullied into submission by the increased interest charge. Where there isn’t a reasonable prospect of success, we will advise our members to settle as quickly as possible. But where we think HMRC is wrong, we will take the fight to them.