VDIM2040 - The law and legal powers: 3 year limit 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.

Assessments of interest are limited to a maximum of 3 years prior to the date the interest was assessed. This means that where a tax assessment is made for an accounting period more than 3 years old, provided it starts on or after 1 April 1990, it may be subject to interest but only for a maximum period of 3 years back from the day before the calculation date on the assessment.

The calculation of interest is limited to a maximum of 3 years prior to the calculation date rather than the issue date; which is later and would result in a higher interest charge. This is set out in Section 74 (3):

‘(3) Where (apart from this subsection) -

(a) the period before the assessment in question for which any amount would carry interest under subsection (1) above; or

(b) the period for which any amount would carry interest under subsection (2) above,

would exceed 3 years, the part of that period for which that amount shall carry interest under that subsection shall be confined to the last 3 years of that period.’

For example an assessment with a calculation date of 2/10/09 in respect of accounting period 07/03, should only carry interest from 2/10/06 to 1/10/09. The exception to this rule is recovery assessments made under Sections 78A and 80(4)(A) for which there is a 2 year cap.