How is interest calculated on a VAT assessment under section 74 of the Value Added Tax Act 1994?

When HMRC raises a VAT assessment under section 73, interest accrues on the full assessed amount at the rate set under section 197 of the Finance Act 1996. Interest runs from the 'reckonable date' — the later of seven days after HMRC's written payment instruction or the VAT return deadline — until the amount is paid in full.

What is the reckonable date for VAT interest purposes under United Kingdom law?

The reckonable date is the later of two dates: the seventh day after HMRC issued a written instruction directing payment under section 73(2), or the latest date by which the VAT return was required to be submitted for the relevant accounting period. Interest begins from this date even if it falls on a weekend or bank holiday.

Is there a maximum period for which HMRC can charge interest on a VAT assessment?

Yes, section 74 imposes a three-year cap on VAT interest. Where interest on an assessed amount would otherwise accumulate for more than three years, only the interest for the last three years of that period is charged. This limits the total interest liability even where payment is significantly delayed.

Does interest apply if a taxpayer voluntarily pays VAT before HMRC raises an assessment?

Yes. Even where a taxpayer pays the VAT due before HMRC formally raises an assessment, interest still applies to the amount paid. It runs from the reckonable date until the date the voluntary payment was made, ensuring that late payment is subject to an interest charge regardless of whether an assessment was issued.

Value Added Tax Act 1994 section 74

Interest on VAT recovered or recoverable by assessment

Section 74 sets out how interest is charged on VAT amounts that HMRC recovers or could recover through an assessment, including the period over which interest runs and the date from which it is calculated.

When HMRC raises a VAT assessment under section 73, the full amount assessed carries interest from the "reckonable date" until it is paid, provided certain conditions about the accounting period are met.
If the VAT due was paid voluntarily before HMRC needed to raise an assessment, interest still applies on the amount paid, running from the reckonable date to the date of payment.
Interest is capped at a maximum of three years — where it would otherwise run for longer, only the last three years of interest are charged.
Where an unauthorised person issues a VAT invoice, interest runs on the VAT amount shown from the date of the invoice until payment, and all interest is paid gross without deduction of income tax.

Access full legislation.And much more.

By becoming a member, your team gets full access to Tax World research tools and source-backed tax resources.

Become a member