EM6006 - Contract Settlements: Interest: General
The guidance about contract settlements at EM6000+ only relates to direct tax. You must never include VAT or VAT penalties in a contract settlement.
At the time you provide the customer with your calculation of tax and NIC due, you must also calculate the interest arising. Any such interest must be calculated up to the anticipated date of payment in the settlement offer, for example - within 30 days of the date of the letter of acceptance.
You may need to emphasise to the customer that interest is not a penalty. Interest is charged on tax which is paid late in order to
- encourage payment at the right time
- compensate the Exchequer for the delay in payment, and
- remove the advantage which those who pay late would otherwise enjoy over those who pay at the right time.
Interest is charged at a rate based on a broad average of the net cost of borrowing and provides normal commercial restitution for the delay and is intended to compensate the customer.
Different rules apply for SA years, EM6008 and pre-SA years, EM6010. Refer to EM4030 and EM4035 for CT rules.
TMA70/S86
TMA70/S87
TMA70/S87A