Surprise 45% corporation tax rate on restitution interest

Following the Summer Budget, the second Finance Bill of 2015 is currently making its way through Parliament. As part of the Bill’s progress, an amendment has been made which has taken many by surprise.

The amendment to the Bill introduces a new special rate of corporation tax, for interest paid by HMRC to companies where tax has been paid under a mistake of law, or when HMRC has unlawfully collected an amount of tax and a court has made a final determination. The alternative scenario is the company and HMRC have, in final settlement of the claim, entered into an agreement under which interest is to be paid.

A corporation tax rate of 45 % (instead of the normal rate of 20 %) will apply where the restitution interest paid by HMRC to companies is greater than the statutory rate. This new rate has been introduced without any warning and, unlike many other tax measures introduced, without consultation.

The new rate will not apply to any element of the payment made by HMRC to the company that represents the repayment of overpaid tax. The new rate will also not apply to interest payments made by HMRC under statutory provisions.

The new corporation tax rate will take effect for awards that are determined on or after 21 October 2015 and HMRC will be required to collect the tax due at source when making payments of restitution interest to the companies on or after 26 October 2015.

HMRC has stated their reasoning for the amendment and have said that the new corporation tax rate “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. 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”. However, there has been some speculation over whether or not this amendment will be met with resistance by the European courts.

HMRC has recently lost a number of court cases and has paid out substantial amounts of restitution interest. This latest move seems to be an attempt to limit those losses in future years.

Should you have any question regarding this new corporation tax rate, please contact your usual Moore Stephens adviser.

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