The Chartered Institute of Taxation (CIOT) has urged the government to review “unfair” repayment interest rates.

This comes as taxpayers are facing late payment bills from HMRC up to 17 times higher than what is returned to those who have overpaid.

HMRC generally charges interest on late payment at the Bank of England base rate, which after last week’s rise currently stands at 4%, plus 2.5%. However, interest on repayment from HMRC to individuals and businesses is the base rate minus 1%.

This means there is often a difference of 3.5 percentage points between the interest charged on late payments by HMRC and that which is paid by HMRC on repayments.

In a representation ahead of the March Budget, the CIOT said the government should now hold a consultation on whether the current rates are suitable.

Head of tax technical at the CIOT, Richard Wild, commented: “The differential between the rate of interest charged by HMRC on late payments, as compared to the interest it pays on overpayments or refunds, is simply inequitable, particularly at times when many businesses and individuals continue to suffer long delays in receiving repayments from HMRC.

“Unless something is done to bridge the gap between repayment interest and late payment interest, the government will struggle to achieve its objectives of building a trusted, modern tax administration system that is seen as fair and even-handed.”

The CIOT highlighted that the government last consulted on the rates of repayment and late payment interest in 2008 and 2009. At the time, the Institute recognised the need for differential interest rates, but stressed the need for repayment interest to provide sufficient recompense, particularly in cases of HMRC error or delay.

HMRC has suggested its current rate “encourages prompt payment” and “compensates taxpayers fairly”, while the system is in line with tax authorities in other countries.

“It is now 12 years since the government consulted on its general approach to repayment and late payment interest,” Wild added. “While some of the findings from the last consultations remain valid, it is right to review whether they remain appropriate.

“We think it’s time to consult to ensure that repayment interest meets the government’s objective to be ‘fair and even-handed’, provides adequate recompense for an individual or business’s loss of money, incentivises HMRC to process repayments in a timely fashion and can apply different rates and processes of repayment interest to different circumstances.”

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