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An image of a banker AccountingWEB Is HMRC Britain's best banker?
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Is HMRC Britain’s best banker?

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As base rates rise and HMRC seems more generous, Philip Fisher suggests a new tax strategy that might help some clients and possibly even accountants.

21st Jul 2023
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Sometimes, the most obvious ideas pass us by. The combination of Britain’s rampant inflation and the cost-of-living crisis has put pressure on both corporate and personal clients and even some accountants are feeling the pinch.

Therefore, any measures that might help to combat financial pain will always be welcome.

While gambling, tax evasion and the latter’s not too distant cousin, abusive tax avoidance may suit some, they come with significant risk of expensive failure with swingeing penalties, so will not be to the taste of many cautious clients.

However, there can be smaller measures closer to home that will assist in alleviating the pain, albeit not to quite such a dramatic degree.

Interest on late payments

Following the aftermath of the financial crash in 2008, interest rates ceased to be a consideration for many. It has been possible to obtain fixed mortgages at around 2%, while interest on bank deposits had ceased to be meaningful, if it was paid at all.

The only people paying through the nose were those who maxed out their credit cards and overdrafts or felt obliged to seek the services of payday lenders.

HMRC followed the trend, charging interest of no more than 2% or 3% on late payments for well over a decade between the beginning of 2009 and last year. This was hardly going to excite the majority of clients or even persuade them to expedite payments, if they had better things to do.

On the other side of the equation, across this period the interest rate in respect of overpaid tax never exceeded 1% and was briefly zero.

However, everything has now changed. Rates are set in legislation based on a simple formula on each side.

These are both linked to the Bank of England base rate.

  • late payment interest is set at base rate plus 2.5%
  • repayment interest is set at base rate minus 1%, with a lower limit of 0.5% (known as the ‘minimum floor’)

According to government guidance: “The late payment interest rate encourages prompt payment. It ensures fairness for those who pay their tax on time. The repayment interest rate compensates taxpayers fairly, when they overpay, for loss of use of their money.”

In the current economic climate, the spin doctors are underselling what could be a really attractive product.

As this article is written, the interest rate for late payments is 7.5%, which is higher than most mortgages but a much better proposition than credit card debt (if you can get any more of it) or a bank loan or overdraft.

While we would never advocate that clients should fail to pay their taxes, if some are suffering hard times and need a deferral, this might be an extremely attractive option.

If the delay is likely to be significant, it is always a good idea to notify HMRC and, ideally, obtain their agreement either to a schedule of payments or some other acceptable proposition.

The bank of HMRC

There has been much press coverage of late regarding banks’ reluctance to increase deposit interest rates as fast as they hit those with mortgages. Most readers in the fortunate position to have money in the bank will be nodding sagely.

Although HMRC is not yet marketing its services as a bank, given a fixed formula that guarantees deposits - which they prefer to classify as overpayments of tax - automatically change every time the Bank of England increases base rates, which seems a likely scenario until late 2023, there could be a strong argument for recommending prudent payments on account.

This has the dual benefit of protecting clients from a relatively punitive rate of interest if they might otherwise underpay and have money in the bank and offering them what is almost certainly one of the most competitive interest rates around on short-term investments, should they eventually be entitled to repayment.

In addition, bank deposits come with at least a small element of risk, since they are only protected to the tune of £85,000. While this might seem a dream for many, most of us will have clients for whom that limit could be highly relevant if, perish the thought, a bank were to crash.

Despite its recent financial calamities, nobody is likely to have any real concerns about HM Government defaulting on its debts, which makes it a safer bet than a commercial bank.

We therefore have a win-win situation that is likely to continue to be worthy of consideration for the foreseeable future.

Replies (5)

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By SteveHa
21st Jul 2023 14:21

My bad - I read the headline with a "w" rather than a "b".

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Replying to SteveHa:
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By Hugo Fair
21st Jul 2023 18:27

Even then, "best" suggests being good at it!

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By davehome
24th Jul 2023 10:03

Am I right in thinking that interest paid by HMRC to individuals on overpaid tax is not taxable? If so, then the 4% rate is even more attractive.

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By sam_swain
24th Jul 2023 10:20

I don't suppose any UK bank is perfect but the ones we have do at least answer their phones for the most part and if I am due a refund I do at least receive it!

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By moneymanager
24th Jul 2023 12:00

Why does that thumbnail remind me of Arthur Daley?

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