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A consultation document has been issued which examines proposals for the harmonisation of interest charged and paid on late paid and overpaid tax, respectively.

Background
This is part of HMRC's programme of legislative changes which aims, amongst other things, to look at how alignment between the interest rules for the various taxes could bring benefits to taxpayers, their advisers and HMRC.

The document follows on from an earlier consultation document published on 19 June 2008, 'Interest ' Working towards a harmonised regime'. The responses to and discussions on the earlier consultation document have been used to develop the key proposals set out in this consultation document.

HMRC propose that an effective interest regime should be based on the principle of recompense, removing the benefit of delaying payment for people who pay late and providing reasonable recompense for those who overpay.

Key issues

• The existing rules have evolved specific to each tax over time and are inconsistent between different taxes, with interest being calculated at different rates, with different formulae, different reference dates, having different names and not always being tax deductible.

Consultation document proposals
The proposals in this document suggest that:

• A single interest rate is applied to late payments of all taxes, with the exception of Quarterly Instalment Payments (QIP).
• The rate should track the Bank of England base rate as this is easily accessible to taxpayers.
• A single rate should also apply to all overpayments of taxes, except for QIPs. This rate should remain lower than the late payment rate.
• Interest should be paid and charged as simple interest.
• The rates under the QIP scheme should be different.

Responses are requested to this consultation document by 13 February 2009. The responses will be published as part of Budget 2009.

Responses to June consultation document
The proposals take into account the key views expressed in the responses to the June consultation document, which were that:

• The Bank of England base rate offered the best realistic recompense to taxpayers.
• There is a rationale for maintaining a differential between interest rates on late payment and overpayments.
• Interest should be charged during the year on late paid PAYE.
• Interest should represent recompense and not a penalty.
• Interest should be calculated on a simple, rather than a compound method, to keep things understandable for taxpayers.
• The current QIP system should remain as it is.

Impact
The main administrative benefits of the new proposed regime would be greater simplicity, greater certainty and greater fairness.