Is it just me or does HMRC's own software calculate tax on interest incorrectly?
Interest is included on the return net, which is rounded (down) to the nearest pound. So if interest of £2.80 is earned gross, it gets added to the return as £2.00.
Then tax deducted at source is calculated by grossing up, so £2.00 divided by 80% is £2.50, meaning £0.50 tax has been deducted at source.
The net figure is then taxed at 10, 20, 40 or 50% respectively! In this case 10% so £0.20, whereas I believe it should be taxed on the gross providing a figure of £0.25.
So instead of being owed £0.25, my client is owed £0.30.
I hope you didn't ask "so what?", so what if my client earned £20,000.80 instead of £2.80? They would have an effective tax rate of 16% and get a £1,000 refund.
I presume commercial software works better but I can't wait for the court case where HMRC blame the tax payer for under-declaring tax by using HMRC's own software. I would be interested in a lawyers interpretation of whether you can sue HMRC for providing dodgy software.
All thanks and praise go to the client who provides you with interest figures on the 30 January.
Welcome to the future, it's broken.