HM Revenue and Customs (HMRC) is set to charge corporation tax to 45 per cent on any interest it has to pay back to taxpayers who initially overpaid the amounts they owed.
In May this year, the Court of Appeal ruled that HMRC should pay compound interest back to Littlewoods – the UK-based retailer – after the company was discovered to have overpaid its VAT bill since 1973.
The new tax applies if a taxpayer was unlawfully required to pay tax under a ‘mistake of law’, meaning that they will be entitled to compensation for any overpayment.
It will not apply to refunds and statutory interest repayments – these will be subject to the current 20 per cent tax rate.
In a statement about the rule change, HMRC said it “reflects both the rates of corporation tax over the period to which typical awards relate, and the effect of compounding interest not taxed in the year to which it relates”.
The tax authority added that: “This is a unique set of circumstances and this measure ensures that recipients of such restitution interest payments do not enjoy an unfair tax advantage at the expense of the public purse”.
In 2012, the European Court of Justice stated that any EU taxpayer had a right to sufficient indemnity but that national laws would decide “in compliance with the principles of effectiveness and equivalence, whether the principal sum must bear ‘simple interest’, ‘compound interest’ or another type of interest”.