HMRC ‘unfairly’ raises interest charges on late taxes

THE tax man has been accused of “stacking the deck in its favour” after it raised interest charges on owed taxes but not on refunds.

Incomes for struggling freelancers will be further hit after HM Revenue & Customs upped the rate at which interest builds on tax debts, from 2.75 per cent to 3 per cent. This was after the Bank of England increased central rates from 0.25 per cent to 0.5 per cent earlier this month.

However, the rate paid by HMRC when it refunds miscalculated and overpaid tax has remained frozen at just 0.5 per cent. This has not risen since 2009.

Phil Kinzett-Evans of tax firm UHY Hacker Young said it was “unfair” and claimed the Government was “taking advantage” of hard-hit freelancers.

“It’s one rule for HMRC and another for taxpayers. The debt rate is directly linked to the Bank of England, so the refund should be too. Anything else smacks of the taxman stacking the deck in its favour,” he said.

“As interest rates continue to climb, the gap between the two rates is only going to get worse. HMRC really should volunteer to bring them back in line as right now, it looks like it is taking advantage,” he added.

HMRC said the late payment rate rises automatically as the Bank Rate does while the refund rate is set at its discretion. It said the latter, paid to ensure taxpayers are not out of pocket when overpaying, would not increase until the Bank raised its rate to 1.5 per cent, not expected until 2023. By this point the charge on late payments would be 4 per cent, meaning HMRC would earn 3.5 percentage points profit on what it charges versus what it pays.

HMRC said increasing the refund rate would encourage freelancers to deliberately overpay as they could get a better return on their cash than a savings accounts. The best easy-access Isa pays just 0.65 per cent, as banks drag their feet over increasing their returns.

The increasing interest is charged on late-paid income, inheritance and capital gains taxes, as well as National Insurance and stamp duty. It comes after a record 2 million people missed the Jan 31 deadline to settle their tax bills.

HMRC dropped its £100 late filing fee after accountants warned omicron had made it impossible to file on time. However, interest has still been charged.

The tax authority defended its actions and said interest on late payments was always set at 2.5 percentage points higher than the Bank Rate. The rate on refunds would never fall lower than a floor of 0.5 per cent, it added.

A spokesman said: “The interest we charge and pay delivers fairness for all. It ensures we do not encourage people to overpay their tax to secure a higher interest rate than is available commercially and those paying their tax late do not get an unfair financial advantage over those paying on time.

“Most other comparable tax authorities take the same approach.”