VDIM5010 | Calculation of interest: Rates of interest

This guidance deals with interest matters in respect of prescribed accounting periods starting on or before 31 December 2022. Interest matters with effect from 01 January 2023 are dealt with under Finance Act 2009.

Please see Compliance Handbook page CH140000 onwards to find the new interest rules guidance.

Interest is charged at a simple not compound rate, this is in line with commercial rates. Section 197 of the Finance Act 1996 allows for the setting of interest rates according to regulations made by the Treasury.

The relevant regulations are the Air Passenger Duty and Other Indirect Taxes (Interest Rate) Regulations 1998.

The regulations provide for an established rate of interest to be charged. Thereafter the rates are linked to the rate set by the Bank of England’s Monetary Policy Committee (MPC). This forum meets monthly to decide whether a change should be made to the base-lending rate.

The regulations have a formula for setting the rate which is based on a reference rate plus 2.5. The reference rate is calculated as the average of the base rates of six major banks, on a reference date each month. The average is rounded to the nearest whole number (with half rounded down). If this is different from the rate on the previous specified date then the formula are applied.

Current and past interest rates can be checked on the Intranet (see HMRC Interest rates) or on VISION in the ‘interest rate table’. Access to the table is via the ‘VISION MAIN MENU’ screen item number 4.